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: January 30, 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
Figure out your life insurance needs and cash value goals before choosing a policy. 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
Your premium splits between insurance costs and your cash value account. In your policy's early years, more goes toward cash value. As you age, insurance costs more, so less of each premium builds cash value.
3
Accumulate Cash Value
You'll need several years to build enough cash value to access. During this time, your account grows at either a fixed or variable rate, depending on your policy type and investment method.
4
Use the Cash Value
Once your cash value reaches the minimum access threshold, you can use it as a living benefit. You can use your policy's cash value in several ways:
- 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 your cash value affects your policy in these ways:
- 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:

Policy loans aren't taxable unless you surrender the policy or it lapses. This lets you access money without owing taxes. But unpaid loans reduce the death benefit your beneficiaries receive.
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 situation and state. Consult a tax professional to understand how cash value life insurance affects your taxes. A tax advisor can help you claim all available tax benefits. This information is educational only and isn't 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

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: Cash value life insurance covers you for life, unlike term policies that expire. Your beneficiaries receive a death benefit no matter when you die.
Cash value growth: Your policy's cash value grows over time, often at a guaranteed minimum rate. Use this money for retirement planning, emergencies or other financial needs.
Dividend payments: Some policies, especially whole life, pay dividends. Take dividends as cash, buy additional coverage or reduce your premiums.
Tax benefits: Cash value growth is tax-deferred, and policy loans are tax-free. This adds to your policy's financial value.

Cons

Higher premiums: Cash value life insurance costs more than term life insurance. The higher price covers the investment component and lifetime coverage, which not everyone needs.
Tax risks: Withdraw more than you paid in premiums or surrender your policy, and you'll owe taxes. Understand how withdrawals work to avoid surprise tax bills.
Fewer investment choices: Your investment options may be limited depending on your policy type. This can reduce your returns, especially when markets perform well.
Policy lapse risk: Miss premium payments or mismanage policy loans, and your coverage can lapse.

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?

Some policies carry investment risks. Whole life insurance usually offers a guaranteed minimum return, while variable policies expose your cash value to market risks that can cause losses.

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 Insurance Producer, is MoneyGeek's resident Personal Finance Expert. He has analyzed the insurance market for over five years, conducting original research for insurance shoppers. His insights have been featured in 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.

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