What Is Cash Value Life Insurance?

Cash value life insurance includes a savings component that grows with interest over time as part of your premium payments, increasing the policy's overall value.

Learn what cash value life insurance is and how it works below.

Select age group

Written by Mark Fitzpatrick

Updated: November 9, 2025

Advertising & Editorial Disclosure

Key Takeaways

Cash value life insurance is a permanent policy that builds savings while providing a death benefit to your beneficiary.

Whole life and universal life are the two main types of life insurance that earn cash value.

Term life insurance doesn't build cash value but costs less than permanent policies.

What Is a Cash Value Life Insurance Policy?

Cash value life insurance is a type of permanent life insurance that earns money and provides a death benefit to a beneficiary. The cash value investment feature of a permanent policy also earns interest.

Universal life and whole life insurance are types of life insurance that have cash value. A life insurance policy that provides a policy owner with cash value costs more than term life insurance, which doesn't include this feature.

You can borrow against or withdraw the balance of the cash value account in an emergency. Different permanent policies build cash value in various ways, and your policy details determine how you can use these funds.

Types of Life Insurance with Cash Value

Policy Type	Description
Whole Life Insurance	Whole life is the simplest type of permanent life insurance. The cash value earns interest at a fixed rate the insurer determines before you purchase the policy.
Guaranteed Acceptance Life Insurance	This is a type of whole life insurance that also earns cash value interest at a fixed rate. Premiums and cost are higher, which leaves a smaller portion of the premium to be set aside for the cash value account.
Simplified Issue Life Insurance	This form of whole life insurance features fixed-rate growth for the cash value account. This policy may grow cash value faster than a guaranteed issue but not as fast as a whole life insurance policy.
Universal Life Insurance	Universal life insurance cash value has a minimum guaranteed growth rate but also aligns with market rates and the insurance company’s financial performance. The interest rate floor allows the cash value to grow at a predictable rate, even if the carrier or investment growth is poor.
Variable Universal Life Insurance	Variable universal life lets you accelerate cash value growth by investing in subaccounts like bonds, mutual funds or stocks. Growth depends on investment performance, and cash value can decline when market performance drops.
Indexed Universal Life Insurance	Indexed universal life uses a stock market index to determine cash value growth. Performance ties to the market index you choose, such as the S&P 500 or Dow Jones Industrial Average.

How Does Cash Value Life Insurance Work?

Cash value life insurance works as a savings and investment vehicle inside your policy. Part of your premium goes into the cash value account, which grows over time. You can access this money during your lifetime and use it in various ways. When you die, any remaining cash value returns to the insurance company.

1
Buy a Cash Value Life Insurance Policy
Determine your life insurance needs and your goals for the cash value to help you decide which policy is right for you. Consider how much coverage you need and whether you want fixed or variable growth for your cash value.

Use our life insurance calculator for a quick estimate.
2
Pay Premiums to Build up Cash Value
Each premium payment is divided between the cost of insurance and your cash value account. In your policy's early years, more of the premium goes toward cash value. As you age, insurance becomes more expensive, reducing how much of each premium builds cash value.
3
Accumulate Cash Value
Building enough cash value to access can take several years. During this time, the value of the account can grow, either at a fixed or variable rate, depending on the policy type and investment method. The cash value for whole life insurance and universal life insurance grows at a fixed rate, while indexed and variable universal life insurance grows at variable rates.
4
Use the Cash Value
Once the cash value of life insurance has grown to a point where you can access it, it’s available to use as a living benefit. There are several ways to use a life insurance policy's cash value, including:
- Making partial withdrawals
- Taking out a loan
- Withdrawing the cash value and surrendering the policy
- Using the cash value for paid-up additions or buying more life insurance
- Using the cash value to pay policy premiums
5
Understand How Using the Cash Value Could Affect the Policy
Using the cash value of a life insurance policy may have the following effects:
- If you make a partial withdrawal and don’t repay it, the unpaid amount will reduce the death benefit paid to your beneficiary.
- If you borrow against the cash value, expect to pay it back with interest or lower the death benefit amount.
- Withdrawing the entire cash value amount will cancel the policy and leave you without life insurance coverage.
- Using the cash value to buy more life insurance or pay premiums can free up money elsewhere, but will reduce or eliminate the cash value growth.

Tax Implications

The growth of the cash value in a life insurance policy is tax-deferred, which means taxes on this growth are not due until the funds are withdrawn. Other tax implications include:

Loans taken against the cash value are generally not taxable as long as the policy is not surrendered or lapses. This can be a significant advantage if you want to access funds without tax liability. If you don't repay the loan, the death benefit paid to your beneficiaries will be reduced.
Withdrawals are taxable if they exceed the amount you've paid in premiums. If you've paid $10,000 in premiums and then withdraw $15,000, you’ll owe taxes on the $5,000 difference.
If you surrender the policy, any gains are taxable as income. This means that if the cash value of your policy has grown beyond the amount you've paid in premiums, you’ll owe taxes on the difference.
The death benefit is generally not taxable to the beneficiary. This makes life insurance an attractive option for transferring wealth to the next generation without incurring estate taxes.

Tax implications vary by individual situation and state. Consider consulting with a tax professional to understand the specific tax implications for your situation. They can help you navigate the complex tax rules and ensure you maximize the tax advantages offered by cash value life insurance. This information is for educational purposes only and should not be considered tax advice

Cash Value Life Insurance Cost

Cash value life insurance can be more expensive than term life insurance because it offers both a death benefit and a savings or investment component that can grow over time.

The costs associated with a life insurance policy with cash value can also vary from person to person due to various factors.

Age

The older you are, the higher your premiums will be for life insurance with cash value. This is because the risk of death increases with age, and insurance companies charge higher premiums to compensate for this increased risk.

Health

If you have health issues, you can expect to pay higher premiums for a cash value life insurance policy. Insurance companies assess your health to determine your life expectancy and the likelihood of paying out the death benefit.

Policy Type

Different types of cash value life insurance policies have varying costs. Whole life insurance typically has higher premiums than universal life insurance but also offers a guaranteed cash value growth rate.

Coverage Amount

The more coverage you want, the higher your premiums will be. The death benefit amount is a significant factor in determining the cost of your premiums.

Riders

Adding riders to your policy can increase the cost. Riders are additional benefits that you can add to your policy, such as a waiver of premium rider or an accelerated death benefit rider.

Location

The cost of living and regulations in your area can affect the cost of your premiums. For example, if you live in an area with a high cost of living, you may pay higher premiums.

When you pay premiums for a cash value life insurance policy, the money is divided into three parts: insurance cost, overhead and fees and the cash value. The cost of insurance and overhead fees are deducted first, and the remaining amount is added to the cash value of a life insurance policy.

Pros and Cons of Cash Value Life Insurance

Weighing the pros and cons of cash value life insurance can help you decide which type of policy is best for you.

Cash Value Life Insurance Pros and Cons

Pros

Lifetime Coverage: Unlike term life insurance, cash value life insurance provides coverage for the insured's entire life. This lifelong protection ensures that beneficiaries receive a death benefit regardless of when the insured passes away.
Cash Value Accumulation: The policy's cash value grows over time, often at a guaranteed minimum rate. You can use this accumulation for various financial needs, such as retirement planning or emergencies, providing additional financial flexibility.
Potential for Dividends: Some cash value life insurance policies, particularly whole life, may pay dividends. You can take the dividends as cash or use them to purchase additional coverage or reduce premiums.
Tax Advantages: The growth of the cash value is tax-deferred, and loans against the cash value are generally tax-free. These tax benefits can enhance the policy's overall financial value.

Cons

Higher Premiums: Cash value life insurance premiums are typically higher than term life insurance premiums. The added cost reflects the investment component and lifelong coverage, which may not be necessary for all individuals.
Potential Tax Liabilities: If not managed properly, actions like withdrawing more than the premiums paid or surrendering the policy can lead to tax liabilities. Proper understanding and management are essential to avoid unexpected taxes.
Limited Investment Options: Depending on the policy type, investment options for the cash value may be limited. This restriction can hinder the potential for higher returns, particularly in favorable market conditions.
Risk of Policy Lapse: If the policyholder fails to pay premiums or mismanages loans against the cash value, the policy may lapse.

Cash Value Life Insurance: Bottom Line

A cash value life insurance policy integrates a savings component with life coverage, offering a financial cushion that grows over time. This feature is available in certain policies, specifically permanent life insurance.

As the cash value in permanent life insurance accrues interest, it enhances the policy's net worth and offers a source of funds that the policy owner can borrow against. A cash value life insurance policy can be an excellent choice for people looking for long-term financial planning tools. It not only offers protection but also aids in wealth accumulation, presenting a valuable option for those focused on both security and investment growth.

Life Insurance Cash Value: FAQ

Life insurance with cash value is great for some, but not everyone. Here are the answers to some of the most common questions about cash value life insurance.

How do you determine the cash value of life insurance?

You can calculate the cash value of life insurance using a cash value life insurance calculator. You can typically find these calculators on insurance company websites or financial advisory sites. This tool can help compute the accumulated earnings of a life insurance policy with a cash value based on premium payments, policy age and the interest rate applied to the cash value, giving a current estimate of available funds.

Who should get a cash value life insurance policy?

A cash value life insurance policy is best for someone who has already maxed out other tax-advantaged savings vehicles, such as a 401(k) or IRA. It can also be a good fit for those with permanent life insurance needs, like paying for end-of-life expenses or someone with a dependent special needs child.

For most, term life insurance is sufficient if you’re solely looking for an affordable death benefit, with other options for investment savings.

Can you lose money in the cash value of a life insurance policy?

Depending on the type of policy, there may be investment risks. Whole life insurance usually offers a guaranteed minimum return, while variable policies may expose the cash value to market risks, potentially resulting in a loss.

What happens if you surrender a permanent life insurance policy?

Surrendering the policy means cashing it out. You'll receive the accumulated cash value minus any surrender fees, but the death benefit will be terminated, leaving you without life insurance coverage.

Do you have to pay back cash value withdrawals?

No, you don't have to repay withdrawals from the cash value, but if not appropriately managed, withdrawals may reduce the death benefit and have tax implications.

What happens if the policyholder passes away without withdrawing their policy's cash value?

If the policyholder passes away without withdrawing the cash value, the insurance company typically retains it. The beneficiaries receive only the death benefit, not the accumulated cash value.

About Mark Fitzpatrick

Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.

Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!

He writes about economics and insurance, breaking down complex topics so people know what they're buying.

Read Full Bio »