What cash value means and why it matters
The cash value of a life insurance policy is the amount of money you can withdraw or borrow against while you are still alive. It exists only in permanent life insurance — whole life, universal life, and variable universal life policies. Term life insurance has no cash value because it covers you for a set number of years and then expires.
Cash value grows over time as you pay premiums. Part of each premium goes toward the death benefit your beneficiaries will receive; the rest goes into a savings component that accumulates. You can access this money by surrendering the policy (ending it), taking a loan against it, or in some cases making a partial withdrawal. Understanding your policy's cash value matters because it affects what happens if you stop paying, what you can borrow, and what you receive if you decide to end the policy.
Key Takeaways
- Your insurance company calculates cash value based on premiums paid, policy charges, interest or investment returns, and how long you have held the policy.
- The cash value statement appears in your annual policy statement or you can request it by calling your insurance company's customer service line.
- Surrendering a policy for its cash value ends your coverage, and you may owe income tax on gains above what you paid in premiums.
- Borrowing against cash value keeps your policy in force but creates a debt that reduces the death benefit your beneficiaries receive.
- Cash value grows slowly in the first few years because surrender charges and administrative fees are highest early on.
How insurance companies calculate cash value
Insurance companies use a formula that starts with the premiums you have paid and subtracts several costs. The main deductions are the surrender charge (a fee for ending the policy early), administrative costs, the cost of the death benefit itself, and any loans or withdrawals you have already taken. What remains is your cash value.
The calculation also includes interest or investment returns, depending on the type of policy. A whole life policy earns a may provide interest rate set by the insurance company. A universal life policy may earn interest tied to market rates or a fixed rate. A variable universal life policy's cash value depends on how the investments you chose perform in the market.
Early in the policy's life, surrender charges are steep — often 10 percent or more of the cash value — so the cash value may be very small or even zero in the first year or two. As years pass, surrender charges decline and eventually disappear, usually after 10 to 15 years. This is why cash value grows much faster in later years than in early years.
Where to find your policy's current cash value
The easiest place to look is your annual policy statement, which your insurance company mails or emails to you once a year. This statement lists your current cash value, the surrender charge that would apply if you ended the policy today, and the net amount you would receive if you surrendered it (cash value minus surrender charge).
If you cannot find your statement or need the information sooner, call your insurance company's customer service number. You can find this on any bill or letter from the company, or search online for "[Insurance Company Name] customer service." Have your policy number ready. A representative can tell you the current cash value in minutes and can also explain what fees or charges apply.
Some insurance companies also offer online account access where you can log in and view your policy details, including cash value. Check whether your company offers this service on its website.
What happens when you surrender a policy for cash
When you surrender a policy, you end your coverage and receive the net cash value — the cash value minus any surrender charges and any outstanding loans against the policy. This money is yours to keep, but there are tax consequences and permanent loss of coverage to consider.
If the cash value you receive is more than the total premiums you paid into the policy, you may owe federal income tax on the difference. For example, if you paid $50,000 in premiums over 20 years and surrender the policy for $65,000, you may owe income tax on the $15,000 gain. Your insurance company will send you a Form 1099-R after you surrender, which you report to the IRS. State taxes may also apply depending on where you live.
Once you surrender, the policy is gone. You no longer have life insurance coverage, and you cannot get the policy back. If you think you might need coverage again later, surrendering is permanent and you would have to apply for a new policy, which could be more expensive if your health has changed.
Borrowing against cash value instead of surrendering
Most permanent life insurance policies allow you to take a policy loan — borrowing money against your cash value without ending the policy. The amount you can borrow is usually up to 90 percent of the cash value, though this varies by policy and company.
Policy loans have advantages over surrender: your coverage stays in force, you do not owe income tax on the loan itself, and you can repay it on your own schedule. However, the loan accrues interest, usually at a rate set in your policy (often 5 to 8 percent, but this varies). Any unpaid loan balance and interest reduce the death benefit your beneficiaries receive. If you die before repaying the loan, your beneficiaries get the death benefit minus what you borrowed plus interest.
If you do not repay the loan and the balance plus interest grows to equal or exceed your cash value, the policy may lapse and your coverage ends. This can happen without warning, so if you take a policy loan, monitor it and make payments to keep the policy active.
Partial withdrawals and other options
Some universal life and variable universal life policies allow partial withdrawals — taking out part of the cash value without borrowing and without ending the policy. This is different from a loan because you are not borrowing; you are removing money from the cash value itself.
Partial withdrawals reduce your cash value and may reduce your death benefit, depending on how your policy is structured. Like surrendering, withdrawals above the amount of premiums you paid may trigger income tax. You also lose the growth potential on the money you withdraw, so the cash value grows more slowly going forward.
Some policies also allow you to use the cash value to pay premiums if you cannot afford them. This keeps the policy in force without you having to write a check, but it reduces your cash value and the eventual death benefit.
Why cash value grows slowly at first
In the early years of a permanent life insurance policy, most of your premium goes toward administrative costs, commissions to the agent who sold the policy, and the cost of the death benefit itself. Only a small portion goes into the cash value account. Additionally, surrender charges are highest in the first few years, which means the cash value statement shows a much smaller net amount than the actual cash value accumulated.
This is why a policy that costs $200 per month might have almost no cash value after one year, even though you have paid $2,400 in premiums. The surrender charge alone might be $2,000 or more. After 10 or 15 years, when surrender charges have dropped to zero or near zero, the cash value grows much faster and becomes a meaningful amount.
Understanding this timing matters if you are considering surrendering a policy. Surrendering in year two or three will likely return very little money. Waiting until surrender charges decline — usually after 10 years — means you receive much more of what you have paid in.
Frequently Asked Questions
Can I access my cash value without ending the policy?
Yes. You can take a policy loan against the cash value, which keeps your coverage active. Some universal life policies also allow partial withdrawals. Both options reduce your cash value and eventual death benefit, but the policy remains in force as long as you manage the loan or withdrawal responsibly.
What if my policy has no cash value yet?
New policies often have little or no cash value in the first year or two because surrender charges are high and most of your premium covers costs and the death benefit. Check your policy statement to see when surrender charges end — usually after 10 to 15 years — and cash value will grow much faster after that point.
Do I owe taxes if I take a policy loan?
No. Policy loans themselves are not taxable. However, if you do not repay the loan and it is forgiven, or if the loan balance exceeds your cost basis (total premiums paid), the excess may be taxable. Consult a tax professional if you plan to take a large loan or let it go unpaid.
What happens to my cash value if I stop paying premiums?
If you stop paying, your insurance company may use the cash value to cover premiums automatically, keeping the policy in force until the cash value runs out. Once the cash value is depleted, the policy lapses and coverage ends. Check your policy documents to see if automatic premium payment is an option.
Is the cash value may provide?
Whole life policies may provide a minimum cash value. Universal life and variable universal life policies do not may provide cash value — it depends on interest rates or investment performance. If rates drop or investments perform poorly, your cash value may grow more slowly or even decline in variable policies.