Guide to Cash Value Life Insurance

Learn about the benefits and drawbacks of cash value life insurance.
By Mike Parker
Updated Sep 8, 2022
A couple researching how they can sign up for Cash Value Insurance.
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Nowadays, people can get life insurance to cover certain expenses, specify coverage lengths, and even add benefits that they’ll be able to use while they’re alive. 

This can make choosing a plan difficult to do. One popular option is a life insurance policy with a cash value component or investment feature. 

This article will explain what cash value policies are, how cash value life insurance works, and what you should know before buying a policy with a cash value component. 

We’ll also cover some life insurance plans that offer cash value and discuss how you can use your cash value in different ways.

What Is Cash Value Life Insurance?

Cash value life insurance policies work the same way as other types of life insurance. A policyholder will pay premiums, and in exchange, their insurance company will guarantee that a death benefit is paid out when the policyholder dies.

Who typically buys a cash value insurance plan?

A cash value insurance plan can offer benefits for:

  • High-income earners

  • People who have maxed out their retirement account contributions

  • People who want an additional account for tax-deferred savings

  • People who want to help their heirs pay estate taxes when they die

The difference is that life insurance plans with a cash value component provide policyholders with a living benefit

This living benefit is a cash account that policyholders can add money towards. The account will grow with interest and act as an investment vehicle that people can use in a number of ways.

A living benefit is a feature of a life insurance policy that can be accessed or used while a person is alive.

Examples of a living benefit include chronic illness coverage, cash value accounts, or disability cover in a life insurance contract. 

Living benefits such as cash value accounts are only available with permanent life insurance policies. Term life insurance plans don’t offer cash value components.

Permanent vs. Term life cover

Permanent life insurance cover is an insurance policy that will continue until the policyholder dies or if they stop paying their premiums.

Term life insurance cover is an insurance policy valid for a specific period. These plans can range in length between a year and thirty years.

If you’d like to learn more about these different types of life insurance, check out our article on term vs. permanent life cover.

Let’s take a look at an example. Back in 2017 Sarah, a 35-year-old accountant from Michigan decided to get a whole life insurance plan with a cash value benefit worth $500,000. 

Each month her premiums were $450, but she decided that she wanted to add additional money to her policy to build up her cash value.

She deposited $750 each month into her policy’s account. Her insurance provider used $450 to cover the cost of her life insurance and put the remaining amount ($300) into her cash value account.

At the start of 2022, she has put away $18,000 in her cash value account. This amount has grown based on the interest rate offered by her provider, and Sarah now has an asset that she can use in different ways.

An older couple signing up for

Source: Pexels

What Can You Do with an Insurance Policy’s Cash Value?

Policyholders can do a few things with their cash value life insurance policy, but this will depend on the terms of their contract and their insurer. Here are some ways to use a life insurance policy’s cash value amount:

Pay premiums to cover your life insurance policy: If a policyholder has enough money in their policy’s cash value component, they can use this money to cover their policy premiums.

Withdraw money from your cash value account: Policyholders can withdraw some funds from their cash value to pay for expenses. Some policies allow unlimited withdrawals, while others limit how much policyholders can take out.

Borrow money against a cash value policy: Policyholders can use their life insurance as collateral for loans and other borrowings such as mortgages, business loans, and personal loans.

Surrender your policy and withdraw all the cash: You can end your life insurance coverage and get your cash surrender value. Your policy will end and you will be able to withdraw all the cash value from your account. However, your insurance company might charge penalties or administration fees if you decide to do this.

What Types of Life Insurance Have a Cash Value or Investment Feature?

As we’ve covered already, cash value components are only available on permanent life coverage plans. Cash value life insurance is a great way of getting coverage and building an asset that people can use throughout their life. 

Permanent life coverage is an umbrella term for the different types of life insurance that do not have an expiration date. These plans will remain in force for the rest of a policyholder’s life as long as they pay their premiums.

There are two main types of permanent life insurance — whole life and universal life. Let’s take a look at the most common permanent life options available:

Whole Life Insurance

This type of life insurance is also known as traditional life insurance. With whole life insurance plans, policyholders get a death benefit and a cash value or savings component which they can add to throughout their life. 

For example, if a person has whole life cover with premiums of $250, they can add to their savings component by paying extra money each month. If they pay $300 each month, the additional $50 will be added to their savings component.

Whole life plans offer a fixed rate of return on cash value components, meaning that any money you put into your plan’s savings will grow at a predetermined rate. This rate will depend on your life insurance company and contract.

Universal Life Insurance

Another permanent life insurance policy that people can buy is universal life cover. Universal life insurance plans offer policyholders more flexibility around death benefit amounts, premiums, and payment terms. 

There are three types of universal life insurance plans that people can buy:

  • Basic universal 

  • Indexed universal 

  • Variable universal

The main difference between these plans is how they allow policyholders and life insurance companies to invest the cash value component of their policy. Let’s take a closer look:

Basic Universal Life Insurance

With general universal life insurance plans, the cash value component of a policy increases at a fixed rate that matches interest or market rates. 

These plans offer the least amount of risk of all universal life insurance plans as insurers will invest this money in safe financial assets and ensure that the cash value grows steadily.

For example, if a person with universal life insurance adds additional money to their policy each month, their money will gain interest at a fixed rate.

A couple that are viewing which plans have Cash Value or Investment Feature.

Source: Pexels

Indexed Universal Life Insurance

Indexed universal life insurance, or indexed life insurance, offers policyholders the option of allocating portions of their cash value to their fixed rate account or investing their savings component in indexes such as the Nasdaq 100, S&P500, or Dow Jones Industrial Average.

These plans can offer higher returns on investments than whole life and standard universal life insurance. However, policyholders can also lose money if investments don’t perform well.

Are indexed universal life insurance plans risky?

Investing cash components in indexes is risky if a person is inexperienced. Here’s an example of how a cash component might grow to help you understand the risks.

This basic example demonstrates how a person can make or lose money if they decide to invest their cash component in an index.

Greg is a 45-year-old man from New York. He has an indexed universal life insurance plan with a $50,000 cash component and decides to invest it in the S&P 500.

Three things might happen to Greg’s money:

  1. If the index grows by 28%, as it did in 2021, his money will increase to $64,000.

  2. The stock market might crash as it did in 2008, when it lost 38.49%. If this happens, his cash component will reduce by $19,245 and he would have $30,755.

  3. If the S&P 500 performs poorly and grows by only 3% as it did in 2005, his $50,000 will increase to $51,500. However, this is less than inflation so Greg would actually lose money on his cash value balance.

If Greg put his cash value into a fixed-rate account with an interest rate of 5%, his $50,000 would increase to $52,500 regardless of the market’s performance.

Variable Universal Life Insurance

Variable life insurance is similar to indexed universal life insurance. However, these plans invest cash components in more types of financial assets such as stocks, bonds, and mutual funds.

These plans have the highest risk of all universal life insurance plans as asset prices can fluctuate dramatically. 

However, they can yield higher returns on cash value than regular universal insurance or indexed universal life insurance.

Does the cash value of life insurance policies increase?

The cash value of a life insurance policy will grow based on how you or your insurer invests your money.

With whole life plans and some universal life plans, your cash value will increase at a fixed rate each year.

With indexed universal life plans, a policy’s cash value is invested in a stock index, and the cash value grows based on the index’s performance.

With variable universal life plans, The cash value of a policy is invested in various investment instruments, such as bonds and stocks. This type of plan can be risky, as your policy’s cash value can increase or decrease.

What Are the Benefits of Having Cash Value Life Insurance?

Having a cash value life insurance policy can offer many benefits. Here are some of the reasons why people like them:

  • People can access funds quickly from their cash value account.

  • They have this facility for their entire lives as long as they pay their premiums.

  • They can use their cash value to pay their life insurance premiums.

  • They can use their cash value in emergencies, or to invest.

  • Any money borrowed is tax-deferred as long as they have their cash value policy.

Things to Keep in Mind with Cash Value Life Insurance

Having a cash value life insurance policy can add convenience and security to your life. However, keep these points in mind if you are considering a permanent life insurance plan with a cash value component:

  • The cash value won’t be paid out to beneficiaries when a policyholder dies. Most life insurance plans will only pay the death benefit stated in the contract and will keep any money that is in your policy’s cash value account.

  • If you borrow money against the cash value of your life insurance policy, the outstanding loan balance will be deducted from your death benefit when it pays out. For example, if you have a death benefit of $500,000 and borrowed $60,000 against your permanent life insurance policies, your beneficiaries would only receive $440,000.

  • You will be charged interest on the loans you take out using your life insurance policy’s cash value.

  • You will still have to pay taxes on any profit or capital gains you make through your cash value account. Permanent life insurance policies are tax-deferred and not tax-exempt. 

Outstanding taxes on investments made through a cash value policy are deducted from a policy’s death benefit if beneficiaries withdraw an amount that is over the federal or state exemption limit. 

  • Cash value life insurance usually costs more than other types of life cover. For example, a term life plan for $150,000 might cost you $200 each month while a cash value life plan for the same amount might cost you $250. 

  • It usually takes some time for whole or universal life plans to build up enough cash value for policyholders to use. In some cases, it would be better to apply for a loan or get financing through other means.

A person signing up for Life Insurance.

Source: Pexels

Which Type of Life Insurance Policy Generates Immediate Cash Value? 

Most permanent life insurance plans take a minimum of two years to generate a cash value.

While cash value life insurance is a good way of investing money and securing your finances, these policies shouldn’t be purchased only for cash value components. 

There are other ways to get immediate cash, such as loans, credit, or mortgages which you should look into.

You’ll also have to consider how your policy is structured, as you may generate a cash value quickly but be limited in how you can use the funds. 

If you are looking to get immediate life insurance coverage without going through a long application process, there are other options you can look into.

One popular option is final expense life cover. These plans offer a smaller death benefit and are easy to qualify for. If you’d like to learn more, check out our article on final expense life insurance or speak with a consultant.

A person that is calculating their Cash Value.

Source: Pexels

Where Can I Learn More about Life Insurance?

If you’re interested in learning more about different types of life insurance, costs, coverage, and other topics check out our Life Insurance Hub.

We also work with some of the most trusted life insurance providers, which means we can help you find a life insurance plan that will offer everything you need.

If you have more specific questions or want to get in touch with top life insurance providers in your area, reach out to one of PolicyScout’s insurance agents to get assistance. Contact us on 1-888-912-2132 or send an email to