What Is Cash Value Life Insurance?

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The primary purpose of life insurance is to provide financial protection for your beneficiaries, such as your surviving spouse or children. But some policies offer additional benefits as well.

For example, life insurance policies with cash value place a portion of your premium payments into an interest-bearing account that grows over time. You can then borrow against that cash value, take withdrawals, or use it to pay future premiums.

Here’s what you need to know about cash value life insurance and how it works.

What Is Cash Value Life Insurance?

Cash value life insurance is a permanent life insurance policy with a built-in savings feature. After your first year of coverage, your insurance begins to accumulate cash value. A portion of each premium payment covers the cost of your insurance coverage; some of your premium is placed into an account that earns interest. Your premiums and the interest they earn accumulate over time and build a cash value.

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How Can You Access Your Policy’s Cash Value?

Unlike the death benefit that goes to your beneficiaries, the cash value is a benefit you can use while you’re still alive. You can access it in a few ways.

Borrow Against It

You can take out a loan on your cash value and use the money any way you want, without needing to qualify with a lender. Like any loan, you have to repay it. Otherwise, the loan is treated as a withdrawal.

Withdraw from It

You can also withdraw cash from your account. Withdrawals generally reduce the death benefit paid to your beneficiaries. Withdrawing the entire balance results in a policy surrender, and you’ll no longer have insurance coverage.

Pay Future Premiums

You may be able to use the cash value to pay for all or a portion of your future premiums. If you use it to pay for the remainder of your premiums, you’ll have a fully paid policy that remains in force without any additional payments.

Which Life Insurance Policies Build Cash Value?

Several types of permanent life insurance policies build cash value.

Whole Life

Whole life is the simplest form of permanent insurance that builds cash value. Your premium amount is set when you purchase your policy and stays the same throughout your life. The cash value earns a fixed interest rate set in your contract, so it grows at a stable and predictable rate.

Universal Life

Universal life is more flexible than whole life insurance. You may be able to change your death benefit, alter your premiums, or even skip payments by using the cash value it has accrued. Unlike whole life policies, the interest rate you earn with a universal life policy changes over time. Your contract states how and when it might change as well as any minimums or caps.

Variable Life

Variable life insurance introduces an investment component to the cash value. Rather than earning an interest rate, the cash value’s growth depends on the performance of the mutual funds you invest in. You can choose from a few options, including a fixed account option if you don’t want to invest your entire cash value.

What Are the Pros and Cons of Cash Value Life Insurance?

Consider the potential benefits and drawbacks of cash value insurance before purchasing a policy.


  • Interest and investment growth are tax-deferred until you withdraw from your cash value.
  • The cash value provides an additional source of funds you can use during your lifetime.
  • Because cash value insurance is a type of permanent insurance, your coverage doesn’t expire.
  • Some policies offer additional flexibility.


  • Obtaining coverage with a cash value policy is typically more expensive than a comparable term policy.
  • Withdrawals from your cash value can reduce the death benefit your beneficiaries receive.
  • It often takes years to accumulate a meaningful cash value.

What Happens to the Cash Value When You Die?

When you die, the death benefit passes to the beneficiaries named on your policy. Any cash value that remains reverts to the insurance company.

For example, suppose you’re covered by a policy with a $300,000 death benefit, and you’ve accrued a cash value of $15,000 when you die. Rather than receiving both the $300,000 death benefit and the $15,000 cash value, your beneficiaries only receive the $300,000 death benefit. The insurance company keeps the $15,000.

Who Is Cash Value Life Insurance Good For?

Cash value insurance may be a good choice if you’re already contributing the maximum amount to other tax-advantaged savings options like workplace retirement plans and individual retirement accounts. If you want to save more money on a tax-deferred basis and need insurance coverage too, a cash value life insurance policy is one option to consider. It can provide financial security from unexpected costs and create a source for loans or withdrawals while alive.

Looking Forward and Planning Ahead

Cash value life insurance can offer several benefits, but it’s important to consider whether this option is right for you. If you have questions about life insurance or want to get a quote, speak with a Colonial Penn agent or visit colonialpenn.com.

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