Cash value is money you can borrow against or withdraw from a permanent life insurance policy while you're still alive

Not all life insurance policies build cash value. Term life insurance — the kind that covers you for 10, 20, or 30 years — has no cash value. You pay a premium, and if you die during the term, your beneficiary gets the death benefit. If you outlive the term, the policy ends and you get nothing back.

Permanent life insurance — whole life, universal life, and variable universal life — works differently. Part of your premium goes toward the death benefit, and part goes into a cash account that grows over time. That account is the cash value. You can access it while living by borrowing against it, withdrawing from it, or surrendering the policy entirely.

The catch is that permanent policies cost significantly more than term policies, and the cash value grows slowly in the early years. Most of your premium in year one goes to the insurance company's costs and commissions, not into the cash account.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life, variable universal life) build cash value; term policies do not.
  • You can borrow against the cash value, withdraw from it, or surrender the policy to receive it, but doing so reduces the death benefit your beneficiary receives.
  • Cash value grows tax-deferred, meaning you don't pay taxes on the growth unless you withdraw more than you paid in premiums.
  • The cash value is typically much lower than the death benefit, and it takes years to accumulate meaningfully.
  • If you stop paying premiums, the insurance company can use the cash value to cover them, but only until the cash value runs out.

How cash value accumulates and grows

The insurance company invests the cash value portion of your premiums. With whole life policies, the company invests conservatively and guarantees a minimum interest rate. With universal life and variable universal life policies, the growth depends on market performance or the index the policy is tied to, so there's more upside but also more risk.

In the first few years, the cash value grows very slowly because the insurance company deducts administrative fees, commissions, and mortality costs. By year 10 or 15, the cash value typically becomes more substantial. By year 20 or 30, it can rival or exceed the total premiums you've paid in.

The growth is tax-deferred, which means you don't owe federal income tax on the gains as long as the money stays in the policy. You only pay taxes if you withdraw more than the total premiums you've contributed.

Borrowing against cash value versus withdrawing it

A policy loan lets you borrow money using the cash value as collateral. You don't have to pay back the loan on any set schedule — the insurance company simply deducts whatever you owe from the death benefit when you die. The interest rate on a policy loan is usually lower than a bank loan, and you don't have to may have access to based on credit or income.

A withdrawal is different. You're taking money out of the cash value permanently. Withdrawals up to the amount of premiums you've paid are tax-free. Anything above that is taxed as ordinary income. If you withdraw money, the cash value shrinks, which means the death benefit shrinks too, and the policy may lapse if the cash value runs out.

With a policy loan, you keep the full death benefit as long as you don't borrow more than the cash value. With a withdrawal, the death benefit is reduced by the amount you take out.

What happens if you surrender the policy

Surrendering a policy means canceling it and taking the cash value as a lump sum. The insurance company will send you a check for the cash value minus any outstanding loans against the policy. You lose all death benefit coverage.

If the cash value is less than the premiums you paid in, you receive the cash value with no tax consequence. If the cash value is more than what you paid in premiums, you owe federal income tax on the difference. Some states also tax the surrender.

Surrendering early — within the first 5 to 10 years — often results in little or no cash value because the fees and commissions are front-loaded. This is why permanent life insurance is not a good short-term investment.

How cash value affects your death benefit

The death benefit and the cash value are separate. When you die, your beneficiary receives the death benefit, not the cash value. However, any outstanding policy loans reduce the death benefit dollar-for-dollar. If you borrowed $50,000 against a $500,000 death benefit and never repaid it, your beneficiary receives $450,000.

If you withdraw from the cash value, the death benefit is reduced by the amount of the withdrawal. Some policies allow you to restore the death benefit by paying additional premiums, but not all do.

If you stop paying premiums, the insurance company can use the cash value to cover them automatically. This keeps the policy in force as long as the cash value lasts. Once the cash value is depleted, the policy lapses and the death benefit is gone.

When cash value makes sense and when it doesn't

Permanent life insurance with cash value is useful if you need lifelong coverage and can afford the higher premiums, or if you want a way to access money tax-deferred for retirement or emergencies. Some people use it as a supplemental savings vehicle alongside retirement accounts.

It's usually not the right choice if you only need coverage for a specific period (like until your kids finish college or your mortgage is paid off), if you're on a tight budget, or if you're primarily interested in building wealth. For most people, term life insurance plus a separate savings or investment account is more cost-effective.

The decision depends on your income, how long you need coverage, and whether you want the flexibility of accessing money from the policy. A financial advisor or insurance agent can run the numbers for your situation.

Frequently Asked Questions

Can I use the cash value to pay my premiums?

Yes. If you stop making premium payments, the insurance company will automatically use the cash value to cover them. This is called a non-forfeiture option. The policy stays in force until the cash value runs out. Once depleted, the policy lapses and you lose coverage.

Is the cash value may provide?

With whole life policies, yes — the insurance company guarantees a minimum interest rate and a minimum cash value at each policy year. With universal life and variable universal life, no — the cash value depends on market performance or index returns, so it can be lower than projected.

Do I pay taxes on cash value growth?

No, not while the money stays in the policy. Growth is tax-deferred. You only pay taxes if you withdraw more than the total premiums you've paid in, or if you surrender the policy and the cash value exceeds your premiums.

What if I need money but don't want to cancel the policy?

Take a policy loan instead of a withdrawal. You keep the full death benefit, and you don't have to repay the loan on any schedule. The loan amount is simply deducted from the death benefit when you die.

Can the insurance company reduce my cash value?

With whole life, no — the cash value is may provide. With universal life, yes — if the policy's investment performance is poor or if fees are higher than expected, the cash value can be lower than projected. This can also cause premiums to increase.