What is cash value life insurance?
Quick Facts
You can use a cash value life insurance policy as a form of savings account
Any cash value accrued can’t be taxed
You must pay back any of the cash value borrowed from the policy, or the death benefit will decrease
If you’re in the market for a life insurance policy or looking to switch to a different one, you’ll soon discover plenty of choices, including life insurance with a cash value attached. When searching for life insurance, the term cash value might come up, and you might wonder how this applies to your coverage.
You’ll also need to consider the type of policy you want because not all cash value policies are the same. Some garner traction early on, while others won’t begin to obtain cash value for years after purchasing the policy. It all depends on the type and amount of life insurance you need.
What is cash value life insurance?
Cash value life insurance is a type of permanent life insurance, life insurance that stays with the policyholder their entire life. It comes with the ability to utilize the attached cash value as a savings account. The cash value accumulated can be used to pay bills or be put towards a loan.
When you have a life insurance policy with cash value, you’ll have funds separate from the death benefit you can use while alive. However, your beneficiaries won’t receive the cash value after your death, only the death benefit.
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How does cash value life insurance work?
Permanent life insurance will provide you with coverage for your entire life. As a result, cash value life insurance policies fall under the permanent category.
As with most permanent life insurance policies, the premiums tend to be higher since the payout is significantly greater than a standard term life insurance policy. Interest will accrue on a life insurance policy’s cash value, meaning a policy’s overall cash value will increase as time goes on. Learn more about term vs. permanent life insurance here.
What would be an example of cash value life insurance?
An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don’t take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder’s death, the insurance company would pay out the full death benefit, which would be $25,000.
The cash value becomes the insurer’s property, meaning the unused $5,000 goes to the company rather than the beneficiaries. With a cash value life insurance policy, the risk rate decreases as time goes on because the cash value offsets the payout.
Find out which type of life insurance policy offers immediate cash value.
What are the advantages and disadvantages of cash value life insurance?
The greatest advantage of this type of life insurance policy is the cash value. Policyholders can withdraw money for loans or to pay their premiums. Plus, taxes get deferred while the cash value is unused, meaning you aren’t taxed based on the amount you accumulated.
Another benefit is that you might receive unlimited withdrawals, depending on your insurance company and your policy type. Always double-check to ensure there’s no limit so you don’t hit the minimum allowed early in the year and end up needing the funds later.
When you withdraw based on the cash value, you can use it to pay for several things, including the policy premium. However, be aware that any cash value removed from the policy accrues interest. So if you have an outstanding amount on your loan, this reduces the amount paid out for the death benefit.
Some insurance companies require interest repayment — if it doesn’t get paid, the company can deduct the interest from the remaining cash value.
Below is a list of cash value life insurance’s pros:
You can borrow against the accumulated cash value to pay bills or the insurance premium.
Your accumulated cash value doesn’t get taxed.
Since cash value is attached to permanent life insurance, you have a longer time frame.
Cash value life insurance also has some downsides, including:
You’ll need to pay the interest associated with the cash value you borrow against.
There might be a monetary limit on how much you can withdraw.
Anything unpaid can reduce the death benefit.
When looking into cash value life insurance, always ensure you know the policy details before buying coverage. Each policy comes with different rules.
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When should you consider buying cash value life insurance?
Compared to other types of life insurance, you should consider a cash value life insurance policy if you need some form of savings or a reserved fund. The amount can develop over the years, spanning decades. Some people choose to use this to accompany their retirement plans.
However, you should note that most cash values won’t accrue until a few years after you’ve purchased the policy.
There are also higher premiums associated with this policy type. However, those high premiums often offset the fact that you save a portion of your payments.
Can you withdraw money from your cash value life insurance policy?
Yes, you can take money from your policy’s cash value, as previously mentioned. You can pay the policy, other bills, or loans with the money. However, when you withdraw money from the cash value of your life insurance policy, your death benefit will decrease, and if you make a withdrawal for the entire amount, your policy will end.
You must pay back what you take out to ensure that you have both the death benefit and the cash value without any outstanding loans.
Making withdrawals can be seen as an advantage in terms of taxes because the IRS deems them as a return of the amount you’ve paid for the policy itself. You won’t pay taxes on the amount you’re withdrawing, but gains from any dividends earned would be taxed.
The Bottom Line on Cash Value Life Insurance
You may want a cash value life insurance policy if you want a more permanent insurance solution. It can also help if you need a way to keep money in a savings account or simply want an additional reserve fund for emergencies.
Double-check with your chosen insurance company on the details of the cash value life insurance policy you research. For example, you’ll want to know whether the policy terminates once you withdraw the entire cash value and if there are limits to how much you can take out at a time.
Frequently Asked Questions
What is a cash value life insurance policy?
Cash value acts as a reserve fund found in permanent life insurance policies. The amount can grow in several ways, including at a fixed rate or with a variable interest rate. You can then use these funds as a life insurance loan.
Can you withdraw money from a cash value life insurance policy?
Can you withdraw money from a cash value life insurance policy?
You can withdraw money from your cash value, but your policy gets canceled if you take all of it at any point. You must also pay back any funds removed from the cash value — otherwise, your death benefit decreases, and you may end up paying taxes.
How long does it take to build cash value with a life insurance policy?
The time it takes to build cash value depends on the policy type you get. Some policies accumulate cash value initially, but others won’t accrue value until a few years after purchasing the policy.
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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
