Cash value is money your life insurance policy builds up over time that you can borrow against or withdraw while you're still alive

Not all life insurance policies have cash value. Term life insurance — the most common and cheapest type — has no cash value at all. You pay a monthly premium for a set number of years (like 20 or 30 years), and if you die during that time, your beneficiary gets the death benefit. If you outlive the term, the policy ends and you get nothing back.

Permanent life insurance — which includes whole life, universal life, and variable universal life — builds cash value. Part of your premium goes toward the death benefit, and part goes into an account that grows over time. This cash value is yours to use while you're alive. You can borrow against it, withdraw it, or use it to pay your premiums.

Cash value grows tax-deferred, meaning you don't pay taxes on the growth each year. You only pay taxes if you withdraw more than you've paid in premiums, or if you surrender the policy and take the full cash value out.

Key Takeaways

  • Only permanent life insurance policies build cash value; term life insurance has none.
  • You can borrow against your cash value at any time, and the loan doesn't require a credit check or income verification.
  • Withdrawing cash value reduces your death benefit dollar-for-dollar, while borrowing against it does not.
  • Cash value grows slowly in the first few years because most of your premium goes toward the insurance cost and the company's fees.
  • If you surrender a policy with cash value, you owe taxes on any gains above what you paid in premiums.

How cash value accumulates in your policy

When you buy permanent life insurance, the insurance company charges you a premium that covers three things: the actual cost of the death benefit, the company's operating costs and profit, and the cash value account. In the early years, most of your premium goes to the first two. The cash value grows slowly at first.

As time goes on, the proportion shifts. More of each premium goes into the cash value account. The longer you hold the policy, the faster it grows. Some policies reach a point where the cash value alone can cover your premiums, so you stop paying out of pocket.

The cash value in a whole life policy grows at a rate set by the insurance company — typically 2 to 4 percent per year, though this varies by policy and company. In a universal life or variable universal life policy, the growth rate depends on market performance or interest rates, so it can be higher or lower.

Borrowing against your cash value

You can take out a loan against your cash value at any time, for any reason. The insurance company lends you the money using your cash value as collateral. You don't have to prove income, pass a credit check, or explain what you need the money for.

The loan itself doesn't reduce your death benefit. If you borrow $10,000 against a $500,000 policy, your beneficiary still gets $500,000 when you die. However, the loan accrues interest, and if you don't repay it, the unpaid balance and interest are subtracted from the death benefit.

Interest rates on policy loans vary by company and policy type, but they're typically lower than credit card rates or personal loans. Some policies allow you to borrow at a fixed rate; others use a variable rate tied to market conditions.

Withdrawing cash value versus borrowing

A withdrawal takes money out of your cash value account permanently. A loan lets you use the cash value without removing it. The difference matters for your death benefit.

If you withdraw $10,000 from a $500,000 policy, your death benefit drops to $490,000. The cash value account shrinks by $10,000. If you later want to restore the death benefit, you have to pay more premiums or add a rider.

Withdrawals are also taxed differently than loans. You can withdraw up to the amount you've paid in premiums tax-free. Anything above that is taxed as income in the year you withdraw it. A loan has no immediate tax consequence, but unpaid loans reduce your death benefit.

When cash value makes sense

Cash value is useful if you want life insurance that lasts your whole life and you're willing to pay higher premiums for it. Permanent policies cost 5 to 15 times more than term policies, but they never expire and they build an asset you can access.

The cash value can serve as an emergency fund or supplemental retirement income. Some people use it to pay premiums in later years when income drops. Others borrow against it to cover a large expense without taking on debt.

Cash value is less useful if you only need life insurance for a specific period — like while your kids are young or while you're paying off a mortgage. In those cases, term life insurance is cheaper and simpler. You get the death benefit protection without paying for cash value you may never use.

Fees and costs that affect cash value growth

Insurance companies charge fees that reduce how fast your cash value grows. These include the cost of the death benefit itself (called the mortality charge), administrative fees, and in some policies, investment management fees.

In the first year or two, these fees can be substantial. A policy with a $500,000 death benefit might have a mortality charge of $500 to $1,000 per year, plus $100 to $300 in administrative fees. That's money that doesn't go into your cash value account.

As your cash value grows, the fees stay relatively flat, so they become a smaller percentage of your account. This is why cash value grows faster in later years. It's also why comparing policies side-by-side matters — two policies with the same premium can have very different cash value growth depending on how the company structures its fees.

What happens to cash value if you stop paying premiums

If you stop paying premiums on a permanent policy, the insurance company can use your cash value to cover the cost of the death benefit. This keeps your policy in force without you paying anything out of pocket — but only as long as the cash value lasts.

The length of time depends on your age, the death benefit amount, and how much cash value you've built up. A policy with $50,000 in cash value might stay in force for several years, or just a few months, depending on these factors.

Once the cash value runs out, the policy lapses and you lose the death benefit. You can't restart it without reapplying and passing underwriting again, which may be more expensive or impossible if your health has changed.

Frequently Asked Questions

Can I lose my cash value if the insurance company fails?

State insurance may provide funds protect cash value in permanent policies if an insurance company becomes insolvent. The level of protection varies by state, but it's typically $250,000 per policy. If your cash value exceeds that amount, the excess may not be protected. Check your state's insurance commissioner's office for the exact limit in your state.

Is cash value the same as the surrender value?

No. Surrender value is what you actually get if you cancel the policy and take the cash out. It's usually lower than the stated cash value because the insurance company deducts surrender charges — fees for closing the policy early. These charges are highest in the first few years and decrease over time.

Can I use cash value to pay my premiums automatically?

Yes. Most permanent policies have an automatic premium loan feature. If you miss a payment, the company automatically borrows from your cash value to cover it. This keeps the policy in force, but the loan accrues interest and reduces your death benefit if not repaid.

Does cash value affect my taxes?

Cash value growth is not taxed each year. You only pay taxes when you withdraw money above what you've paid in premiums, or when you surrender the policy. Loans against cash value are not taxable events. If the policy is part of an estate, the death benefit is generally not taxable to your beneficiary, but the cash value may be included in your taxable estate for estate tax purposes.

What's the difference between whole life and universal life cash value?

Whole life policies have a may provide cash value growth rate set by the company. Universal life policies have variable growth tied to interest rates or market performance, so the cash value can fluctuate. Whole life is more predictable; universal life offers the potential for higher growth but with more risk.