How Whole Life Insurance Cash Value Works

Whole life insurance does more than pay a death benefit. It builds a living financial asset called cash value, which grows inside your policy on a tax-deferred basis for as long as you keep the coverage.

Yes, all whole life insurance policies build cash value. Cash value isn't an optional add-on but a core feature built into every whole life policy. Part of each premium covers the cost of insurance and insurer fees. The rest grows in your cash value account, tax-deferred.

Term life insurance doesn't build cash value at all, which is one of the main reasons whole life costs more. Some policy types, like modified whole life, build cash value more slowly in the early years, but every permanent whole life policy builds it eventually.

Whole life insurance builds cash value through a guaranteed growth rate set by your insurer at the time you purchase the policy. The rate is fixed, meaning your cash value account grows steadily regardless of stock market performance. 

Some whole life policies from mutual insurance companies also earn dividends. You can put those dividends directly into your cash value to grow it faster. The guaranteed rate is modest compared to market investments, but it won't drop during downturns. That stability matters if you're using a whole life policy as part of a larger financial plan.

The cash value a whole life policy builds depends on your coverage amount, your age at purchase, premium size and your insurer's guaranteed growth rate. A 35-year-old with a $500,000 whole life policy might accumulate $50,000 to $75,000 in cash value after 15 years.

Ask your insurer for a current policy illustration, which shows year-by-year cash value estimates and where your account stands now. You can request an updated illustration at any point. To estimate how much coverage you need before buying, use MoneyGeek's life insurance calculator.

The most common way to use whole life cash value is through a policy loan, but you can also access it through withdrawals, full surrender and infinite banking:

• Policy loans let you borrow against your cash value without a credit check or a required repayment schedule. The loan accrues interest, and any unpaid balance reduces your death benefit dollar for dollar. This is the most common method because it doesn't trigger income taxes. For a detailed breakdown of how borrowing works, see MoneyGeek's guide on how to borrow from life insurance.
• Withdrawals pull cash directly from your account. Amounts up to your cost basis (the total premiums you've paid in) come out tax-free. Any amount above your cost basis is taxable as ordinary income.
• Surrendering the policy means canceling your coverage in exchange for the full cash surrender value, minus any surrender fees the insurer charges. Your coverage ends permanently, and you'll owe taxes on gains above your cost basis.
• Infinite banking is a strategy that uses policy loans as a personal financing system. It's a complicated approach that works best with large, well-funded policies and requires careful management to avoid lapses..

Once your cash value grows large enough, you can also use it to pay your premiums, keeping your policy active without paying out of pocket.

Whole life insurance cash value grows tax-deferred, meaning you don't owe taxes on gains while the money stays inside the policy. Policy loans are also tax-free. Withdrawals are tax-free up to the amount you've paid in premiums. 

Any withdrawal above your cost basis, or a full surrender with gains, triggers ordinary income tax on the amount over what you paid in. A large surrender will trigger a substantial tax bill, so talk to a tax advisor before you cancel your policy.

When you die, your beneficiaries receive the death benefit, not the cash value. The insurer keeps the cash value when it pays the claim. If you have a $500,000 policy with $90,000 in cash value, your beneficiaries get $500,000 and the insurer retains the $90,000. 

Some whole life policies include a return of cash value rider that pays both amounts to your beneficiaries, but that rider increases your premium. If maximizing the death benefit is your priority, it's worth comparing the cost of that rider against its added value with one of the best whole life insurance companies.