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 kind that covers you for a set number of years — has no cash value at all. You pay premiums for the coverage period, and if you don't die during that time, the policy expires and you get nothing back.

Permanent life insurance — which includes whole life, universal life, and variable universal life — does build cash value. A portion of your premium payment goes into a savings component that grows over time. This cash value belongs to you, and you can access it before you die.

The cash value grows slowly at first. In the early years of a whole life policy, most of your premium goes toward the insurance company's costs and commissions, not into the savings pot. After several years, the cash value accelerates and can grow substantially, especially in whole life policies where the growth is may provide.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life, variable universal life) build cash value; term life insurance does not.
  • You can borrow against your policy's cash value or withdraw it, though doing so reduces the death benefit your beneficiaries receive.
  • Cash value grows tax-deferred, meaning you don't pay taxes on the growth until you withdraw money or surrender the policy.
  • Whole life policies have may provide cash value growth, while universal and variable policies depend on market performance or interest rates.
  • Surrendering a policy for its cash value ends your coverage and may trigger taxes on gains above what you paid in premiums.

How cash value grows in different policy types

Whole life insurance has a may provide cash value that increases by a set amount each year. The insurance company invests your premiums and credits a portion of the returns to your cash value account. Because the growth is may provide, you know exactly what your cash value will be at any point in the future — the policy includes a table showing this. Whole life premiums are higher than term life, partly because you're paying for this may provide growth.

Universal life insurance ties cash value growth to interest rates set by the insurance company. When interest rates are high, your cash value grows faster. When rates drop, growth slows. The policy has a minimum may provide rate, usually around 2 percent, but the actual rate can vary year to year. This makes universal life cheaper than whole life but less predictable.

Variable universal life insurance lets you direct your cash value into investment subaccounts — similar to mutual funds. Your cash value grows or shrinks based on how those investments perform. This offers the potential for higher returns but also real risk: your cash value can decline if the market falls. You control where the money goes, which gives you more say but also more responsibility.

Borrowing against your cash value

Once your cash value reaches a certain level — usually after three to five years — you can borrow against it. The insurance company lends you money using your cash value as collateral. You don't have to repay the loan on any set schedule, and the lender won't check your credit or income.

The loan accrues interest, typically at a rate the policy spells out in advance. If you don't repay the loan before you die, the insurance company deducts what you owe from the death benefit your beneficiaries receive. If the loan balance grows larger than your cash value, the policy can lapse and your coverage ends.

Borrowing against your policy doesn't trigger a tax bill, because the IRS treats it as a loan, not income. However, if you surrender the policy while a loan is outstanding, the forgiven loan amount may be taxable.

Withdrawing cash value versus surrendering the policy

You can withdraw money from your cash value without ending the policy. The amount you withdraw reduces both your cash value and your death benefit. If you withdraw $10,000 from a $100,000 policy, your beneficiaries will receive $90,000 when you die, not $100,000. Withdrawals up to the amount you've paid in premiums are not taxable. Withdrawals above that are taxable as income.

Surrendering the policy means you give it back to the insurance company and receive the full cash value in exchange. Your coverage ends immediately. Any gain — the difference between what you've paid in premiums and the cash value you receive — is taxable as income. If you paid $50,000 in premiums over 20 years and the cash value is $75,000, you owe income tax on the $25,000 gain.

Surrendering also triggers surrender charges in the early years of the policy. These fees, which can be substantial, compensate the insurance company for the cost of issuing and managing the policy. Surrender charges typically decline over time and disappear after 10 to 15 years.

When cash value makes sense

Cash value is useful if you want life insurance that lasts your entire life and also functions as a savings tool. Whole life policies, in particular, offer a predictable way to build wealth that's protected from creditors in many states and grows tax-deferred. Some people use cash value as an emergency fund or to fund large expenses later in life.

Cash value is expensive. Whole life premiums can be five to ten times higher than term life for the same death benefit. You're paying for both insurance and a savings account, and the savings account grows slowly in the early years. If you need life insurance only temporarily — to cover a mortgage or replace income while children are young — term life is usually the better choice.

Universal and variable universal policies offer a middle ground: lower premiums than whole life but still a cash value component. The trade-off is less certainty about how much cash value you'll have, since it depends on interest rates or market returns.

Tax treatment of cash value

Cash value grows tax-deferred. You don't owe taxes on the growth each year, the way you would with a regular savings account or investment account. This tax deferral is one of the main advantages of permanent life insurance.

Taxes become due only when you withdraw or surrender the policy. Withdrawals up to your cost basis — the total premiums you've paid — are tax-free. Anything above that is taxable income. If you die while the policy is in force, your beneficiaries receive the death benefit tax-free, and the cash value is not taxed separately.

If you borrow against the cash value and never repay the loan, the forgiven amount may be taxable. This is one reason to be cautious about taking large loans: if the policy lapses before you repay, you could face an unexpected tax bill.

What happens if you stop paying premiums

If you stop paying premiums on a policy with cash value, the insurance company can use the cash value to pay the premiums for you — a feature called automatic premium loan. The policy stays in force, but the cash value shrinks as it covers the premiums. Eventually, if the cash value runs out, the policy lapses and your coverage ends.

Alternatively, you can use the cash value to convert your policy to a paid-up policy with a reduced death benefit. This ends your premium payments but keeps you insured for life, though for a smaller amount. The exact options depend on your policy and the insurance company's rules.

Frequently Asked Questions

Can I access my cash value before retirement?

Yes. You can borrow against it or withdraw it at any time, as long as the policy has been in force long enough for cash value to build. Borrowing doesn't trigger taxes, but withdrawals above your premiums paid are taxable. Withdrawals also reduce your death benefit.

What's the difference between cash value and death benefit?

The death benefit is what your beneficiaries receive when you die. Cash value is money you can access while alive. In whole life insurance, the death benefit and cash value are separate — your beneficiaries get the death benefit, not the cash value. If you borrow against the cash value and don't repay, the loan is deducted from the death benefit.

Is cash value a good investment?

Whole life cash value grows slowly but predictably and is protected from creditors in many states. It's not designed to compete with stock market returns. If you want investment growth, a brokerage account or retirement account usually offers better returns. Cash value makes sense if you want permanent insurance and a tax-deferred savings component combined.

What happens to cash value if I die?

Your beneficiaries receive the death benefit, not the cash value. The cash value stays with the insurance company. This is why the death benefit in whole life policies is separate from the cash value — you're not "getting" the cash value when you die; your heirs get the stated benefit amount.

Can I use cash value to pay for long-term care?

Yes, you can withdraw or borrow against the cash value for any reason, including long-term care expenses. However, withdrawals above your premiums paid are taxable, and borrowing reduces your death benefit if the loan isn't repaid. Some policies offer long-term care riders that let you access the death benefit for care costs while still living.