Cash Value Life Insurance Explained

Cash value life insurance policies offer living benefits and may come with a higher price tag.

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Cash value life insurance

Cash value life insurance is a form of permanent life coverage that provides living benefits through accrued cash value. These living benefits can be accessed before the death of the insured. Commonly interchanged with whole life insurance, the term cash value life insurance serves as a general title for many types of permanent life insurance policies.

Let’s explore what exactly cash value life insurance is and whether such a policy is right for you.

Cash value life insurance defined

Cash value life insurance is an umbrella term used to describe a variety of permanent life insurance solutions, all of which allow policyholders to earn cash value throughout the life of their insurance policy. Cash value builds as you pay your premiums; a percentage of each premium payment is set aside as tax-deferred monies that accrue at the interest rate specified in your policy. Cash values are meant to be accessed while the policyholder is living and are considered separate from the policy's death benefit, which is paid out to beneficiaries upon the policy owner’s passing and free from income tax.

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Types of cash value life insurance

There are several different types of life insurance policies you may choose from that build cash value.

The most well-known is whole life insurance, but there are several others that might be more suitable for your situation.

  • Whole life: Whole life insurance is a form of permanent insurance that covers you for the duration of your life. While this type of policy is more expensive due to its permanence, it is attractive to those who wish to build cash values while paying level premiums throughout the life of the policy. 
  • Universal life: Universal life insurance is another type of permanent policy. The main difference between universal and whole life policies is that the cash value is associated with a specific stock index instead of a fixed percentage. This leaves the cash value vulnerable to decline if the market underperforms.
  • Variable life: Variable life insurance provides death benefits and cash values that vary according to the investment returns of stock and bond funds. The policyholder can select from available funds, allowing the policyholder to be more or less aggressive.
  • Variable universal life: this is a type of universal life policy that allows the policyholder to select the investment risk. It may provide a minimum guaranteed death benefit, but most often there is no guarantee of death benefit or cash values.


Comparing policy types:

Type of Policy Cost Investment Risk Cash Value Growth
Whole Life High Low Slow and steady
Universal Life Medium-High Medium Depends on performance of the stock market index
Variable Life Medium-High High Depends on the investment returns of selected funds
Variable Universal Life High User selected Depends on the investment returns of selected funds

Pros and cons of cash value life insurance

Much like other forms of insurance, cash value life insurance comes with its share of advantages and disadvantages. The bottom line is: cash value life insurance policies give opportunities for loan or investment needs, but are some of the more expensive forms of life insurance.

Pros and cons of cash value life insurance include the following: 

Pros Cons
Life insurance coverage lasts your entire life Expensive: often 5-10 times more than term life insurance
Provides living benefits if needed Takes time to build up cash value
Cash values can be used for a variety of purposes Cash value is not added to your death benefit
Cash values are tax-deferred and interest is kept at a fixed rate Taxes are deferred until withdrawal
Can surrender the policy and cash out at any time Limited investment options and low rate of return

How to Choose a Cash Value Life Insurance Policy

Choosing a cash value life insurance policy involves assessing your financial situation, future goals, and risk tolerance. Here are a few scenarios to illustrate how these factors can influence your decision:

Scenario 1: "Maxed-Out Mike"

High-Income Earner with Maxed Out Retirement Accounts

If you're like "Maxed-Out Mike", a high-income earner who has maxed out other retirement accounts and is looking for additional tax-advantaged savings, a variable life insurance policy might be suitable.

Scenario 2: "Conservative Carla"

Prefers Guaranteed Cash Value Growth

If you're like "Conservative Carla" and prefer a more conservative approach with guaranteed cash value growth and fixed premiums, a whole life insurance policy could be a good choice.

Scenario 3: "Flexible Fred"

Seeking Flexible Premiums and Potential for Higher Returns

If you're comfortable with risk and want the possibility of higher returns, along with flexible premiums like "Flexible Fred", a universal life insurance policy may be fitting.

Scenario 4: "Investor Isabel"

Desires Maximum Investment Flexibility

If, like "Investor Isabel", you want to have maximum control over your investments, you might consider a variable universal life insurance policy.

Remember, it's always best to speak with a financial advisor or insurance professional before making a decision. They can help you fully understand the risks and benefits of each policy type, and guide you in choosing a policy that best suits your needs.

How does cash value life insurance work?

Think of cash value as an investment or savings account. It is intended to be spent while the policy owner is still living, and can be put towards a variety of uses. You can use the cash value to pay the policy premiums, take out loans, or save as a retirement income supplement. It is also available to withdraw if you are in need of cash immediately and no longer need life insurance; cash value life insurance allows you to surrender the policy and cash out with your balance. 

Here are some ways that the cash value portion of your policy can come in handy:

  1. Financial Support: When times get tough, your cash value can lend a hand. You may choose to use it to pay your policy premiums, ensuring that your life insurance coverage continues uninterrupted.

  2. Retirement Backup: As you approach retirement, your cash value can supplement your retirement income and provide an additional financial cushion.

  3. Loan Leverage: Need a loan? Your cash value can serve as collateral, opening up possibilities when you need them the most.

  4. Emergency Funds: Faced with an immediate need for cash? You have the option to surrender the policy, effectively cashing out your balance. It's like having a parachute when you need a safe landing.

Is a cash value policy worth it?

A cash value life insurance policy may be better suited for people in unique financial circumstances, but most people tend to opt for a lower-cost solution like term life insurance. Cash value policies are best for: 

  • High-income earners who have exhausted other retirement accounts and are seeking additional savings
  • High-net-worth individuals who need a solution for a tax-free inheritance for their children
  • People with special needs children who are at a higher risk of experiencing unexpected financial obligations. 

If you are interested in using cash values during your lifetime and you’re willing and able to pay higher premiums, consider a cash value policy. Due to the high premiums and limited opportunities for which the cash value is usable, many applicants choose to enroll in a term policy and explore other options for investments or retirement funds, like a 401k or IRA. 

For more information on which type of life insurance policy might be right for you, contact your insurance agent or consult with a variety of life insurance companies.


When you pass away, the insurance company pays out the death benefit to your beneficiaries. The cash value is not typically included with the death benefit. Any remaining cash value goes back to the insurance company unless you have a policy rider that adds the cash value to the death benefit.

Yes, you can make withdrawals from the cash value of your policy. However, keep in mind that withdrawals may reduce the death benefit and could have tax implications if the amount you've withdrawn exceeds the amount you've paid in premiums.

Cash value typically starts to accumulate after the first year of premium payments, but it may take several years to see significant growth. The growth rate depends on the type of policy and the terms set by the insurance company.

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