What Is Cash Value Life Insurance?

Cash value life insurance includes a savings component that earns interest and grows over time. Part of your premium goes toward this cash value, which increases your policy's overall value.

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

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Written by Mark Fitzpatrick

Updated: June 8, 2026

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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 permanent life insurance that builds savings and provides a death benefit to a beneficiary. The cash value portion earns interest over time.

Universal life and whole life insurance both build cash value. These policies cost more than term life insurance, which doesn't include cash value.

You can borrow against or withdraw cash value in an emergency. Different permanent policies build cash value in different ways. Your policy details control how you can use these funds.

Types of Life Insurance With Cash Value

Policy Type	Description
Whole Life	Permanent policy with the most straightforward structure. Your cash value earns interest at a fixed rate set by the insurer when you buy the policy.
Guaranteed Acceptance	A whole life policy that earns cash value interest at a fixed rate. Higher premiums mean less money goes into your cash value account.
Simplified Issue	A whole life policy with fixed-rate cash value growth. Your cash value grows faster than guaranteed acceptance policies but slower than standard whole life.
Universal Life	Your cash value has a guaranteed minimum growth rate that adjusts with market rates and your insurer's financial performance. The minimum rate protects your cash value growth even when the carrier or investments perform poorly.
Variable Universal Life	You can grow cash value faster by investing in subaccounts like bonds, mutual funds or stocks. Your cash value grows or shrinks based on investment performance.
Indexed Universal Life	Cash value growth tracks a stock market index like the S&P 500 or Dow Jones Industrial Average. Your returns match the index you choose.

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 through withdrawals or loans. When you die, any remaining cash value returns to the insurance company.

1
Buy a Cash Value Life Insurance Policy
Before choosing a policy, determine how much coverage you need and whether you want fixed or variable cash value growth. Our life insurance calculator gives you a quick estimate.
2
Pay Premiums to Build Up Cash Value
Each premium splits between insurance costs and your cash value account. In the early years, a larger share goes toward cash value. As you age, insurance costs rise, so a smaller portion of each premium adds to cash value.
3
Accumulate Cash Value
Building enough cash value to access takes several years. Your account grows at a fixed or variable rate over that period, depending on the policy type and investment method.
4
Use the Cash Value
Once your cash value hits the minimum access threshold, it's available as a living benefit. You can use it in five ways:
- Partial withdrawals
- Policy loans
- Full withdrawal with policy surrender
- Paid-up additions or purchasing more life insurance
- Paying policy premiums
5
Understand How Using the Cash Value Could Affect the Policy
Each access method has consequences:
- A partial withdrawal you don't repay reduces the death benefit your beneficiary receives by the unpaid amount.
- A policy loan accrues interest. Leaving it unpaid reduces the death benefit.
- Withdrawing the full cash value cancels the policy and ends your coverage.
- Using cash value for paid-up additions or premium payments frees up cash elsewhere but reduces or eliminates further cash value growth.

Tax Implications

Cash value growth is tax-deferred. Taxes on that growth don't come due until you withdraw the funds. Other tax considerations:

Policy loans aren't taxable unless the policy lapses or you surrender it. Unpaid loans reduce the death benefit your beneficiaries receive.
Withdrawals above the total premiums you've paid are taxable. If you've paid $10,000 in premiums and withdraw $15,000, you owe taxes on the $5,000 difference.
Surrendering the policy makes any gains taxable as ordinary income. If your cash value has grown past what you paid in premiums, you owe taxes on the difference.
The death benefit is generally not taxable to the beneficiary, which is one reason cash value life insurance gets used for intergenerational wealth transfers.

Tax implications depend on the situation and the state. A tax advisor can help you claim tax benefits.

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
Cash value life insurance costs vary by policy type. Whole life insurance costs more than universal life insurance but guarantees your cash value growth rate.
Coverage Amount
Higher coverage amounts mean higher premiums. Your death benefit directly affects how much you pay.
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.

Your premium payments split into three parts: insurance cost, overhead and fees, and cash value. Insurance costs and overhead fees come out first. The remaining amount goes into your cash value.

Pros and Cons of Cash Value Life Insurance

Review the pros and cons of cash value life insurance before choosing a policy.

Cash Value Life Insurance Pros and Cons

Pros

Lifetime coverage: Term policies expire. Cash value life insurance doesn't. Your beneficiaries receive a death benefit whenever you die.
Cash value growth: The cash value grows at a minimum guaranteed rate and is available for retirement planning, emergencies or other financial needs.
Dividend payments: Some policies, particularly whole life, pay dividends. You can take dividends as cash, apply them to additional coverage or use them to reduce premiums.
Tax benefits: Cash value growth is tax-deferred and policy loans are tax-free, both of which lower the tax cost of accessing the money.

Cons

Higher premiums: Cash value life insurance costs more than term. The added cost pays for the investment component and the lifetime coverage guarantee.
Tax risks: Withdrawals above your total paid premiums are taxable, and surrendering the policy triggers taxes on any gains.
Fewer investment choices: Investment options are more limited than a standalone investment account, which caps potential returns.
Policy lapse risk: Missed premium payments or unmanaged policy loans can cause the policy to lapse and end your coverage.

Cash Value Life Insurance: Bottom Line

Cash value life insurance combines life coverage with a savings component that grows over time. Only permanent life insurance policies include this feature.

The cash value earns interest and increases your policy's worth. You can borrow against this cash value when needed. Cash value life insurance works well for long-term financial planning. It provides death benefit protection and helps you build wealth.

Life Insurance Cash Value: FAQ

Life insurance with cash value works well for some people, 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?

Use a cash value life insurance calculator to find your policy's current value. Most insurance companies and financial advisory sites offer these calculators. The calculator estimates your accumulated earnings based on your premium payments, policy age and interest rate.

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?

It depends on the policy type. Whole life insurance has a guaranteed minimum return, so the cash value doesn't shrink. Variable policies tie your cash value to market performance, and losses are possible if the market drops.

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 managed properly, withdrawals may reduce the death benefit and have tax implications.

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

The insurance company keeps the cash value. Beneficiaries receive only the death benefit, not the accumulated cash value.

About Mark Fitzpatrick

Mark Fitzpatrick, a Licensed Property and Casualty (P&C) Insurance Producer in Connecticut, is MoneyGeek's resident insurance expert. He has spent nearly a decade analyzing the market, first at LendingTree and now at MoneyGeek, where he produces original research on hundreds of carriers and millions of rates across auto, home, renters, health and life insurance.

He covers economics and insurance at MoneyGeek, and his work has been featured in The Washington Post, The New York Times and NPR, among other outlets.

Like all MoneyGeek analysts, he draws on independent cost and consumer experience data. No insurance company partnership influences his recommendations.

Mark holds a B.A. from Boston College and an M.A. in Economics and International Relations from Johns Hopkins University. He started his career in financial risk management at State Street and is also a five-time “Jeopardy!” champion.

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