How Does Cash Value Life Insurance Work?

Cash value life insurance is a permanent policy that offers a savings-like element apart from the death benefit. Term life insurance and the various permanent life products, including whole life and universal life, have important distinctions. One of them is the monetary value of permanent policies.

Term life insurance products do not provide this benefit, but whole life and universal life insurance do. Cash value life insurance comes with a price tag that is higher than standard life insurance.

Some consumers may see the benefit of purchasing this kind of life insurance, but not all. What you should know about cash value life insurance and if it’s appropriate for you is provided below.

How Does Cash Value Life Insurance Work?

Cash Value Life Insurance

The savings component of permanent life insurance plans like whole life or universal life is referred to as the “cash value” in cash value life insurance. It is not a part of the death benefit and can only be used by the policyholder while they are still alive.

Your premiums for cash value life insurance are split into two parts:

  • the financial value of
  • Paying for the exact insurance you need

Premiums are often more expensive than they would be for a term life insurance policy where you only pay for the death benefit because you are paying for both the cash value and the death payment.

Types of Cash Value Life Insurance

The primary types of cash value life insurance are the following:

  • Whole Life: With whole life insurance, the amount of the cash value grows at a minimum guaranteed rate that is fixed. By adding the firm dividends to the policy, you can hasten the process of cash value accumulation.
  • Universal Life: Cash value can be used to pay for policy premiums with universal life insurance. Depending on the interest rate chosen by the insurance company, the rate at which cash value accumulates varies.
  • Variable Life: With variable life insurance, your investments in the mutual funds that your insurance provider offers determine how much cash value you will eventually get. Growth of the cash value is not ensured.

How Does It Work?

You can choose to pay a premium on a monthly or annual basis when you purchase a whole life or universal life insurance policy.

The premiums are set in a variety of ways:

  • The premiums for whole life insurance policies are set.
  • Indexed universal life insurance premiums can be adjusted more easily.

If there is enough cash value in an indexed universal life insurance, you may be able to pay a cheaper premium or forego paying any at all, according to Sam Price, an independent agent & broker with Assurance Financial Solutions.

Your insurance provider will use a portion of the premiums you pay toward the death benefit of your policy and invest the remaining sum in the stock market. The latter is the section that creates financial value.

While you are still alive, cash worth benefits you the greatest. You can utilize money in a variety of ways, including to pay off debt, cover some expenses, and augment your retirement income.

Here are three ways you can use cash value:

  • Paying your premiums is something that most insurance companies won’t let you do until you’ve had the policy for at least a year. If you choose a universal life insurance policy, you risk using up the entire cash value that has accumulated in the policy.
  • Borrow money against your insurance policy: You can take out a loan against some of your cash value, but you’ll have to pay interest. The drawback of this strategy is that if you default on the loan, the money will be taken out of the death benefit that your beneficiaries will get.
  • Cashing Out: You can take money out of your policy in full or in part if you have cash value life insurance. If you do this with a whole life insurance policy, the death benefit may be reduced by an amount greater than what you withdrew. It might dollar-for-dollar cut the death benefit in a universal life policy. For instance, your beneficiaries will only receive the $225,000 death benefit from your insurance if you have a $250,000 policy and withdraw $25,000.

It’s also crucial to keep in mind that cash value life insurance must be surrendered during the first few years or its value will depreciate.

If you have the financial means to pay the higher rates, cash value life insurance may be a good investment.

One school of thinking, however, contends that it is preferable to “purchase term and invest the rest.” By choosing this option, you would benefit from term life insurance deals with lower premiums for a predetermined amount of time (typically up to 30 years). The cost savings would subsequently be invested in the stock market.

Pros and Cons of Cash Value Life Insurance

While there are pros to a cash value life insurance policy, there are also quite a number of cons. Pros first:


  • If the cash value amount is less than or equal to the policy’s purchase price, taxes are postponed; however, if it is higher, taxes are due.
  • It provides coverage for your entire life.
  • You’re qualified to borrow against the cash value.


  • Your guaranteed death benefit is reduced by withdrawals from the cash value while the interest and unpaid policy loans are subtracted from the guaranteed death benefit.
  • There’s a very limited number of investment options with usually low rates of return.
  • The premiums are more expensive out of pocket.

How Long Does Whole Life Insurance Take to Build Cash Value

To accumulate sufficient assets to access the cash value of whole life insurance, you should plan on at least 10 years. Ask your financial advisor how long your coverage is projected to last.

Keep in mind that the funds are subject to taxation. You can borrow money against your policy in many cash value policies as an additional choice. However, interest will be charged.

In retirement, cash value can be used as a source of income. Simply analyze the advantages and disadvantages, and determine if there is another revenue stream from which you may obtain funding.