What is Cash Value Life Insurance

Cash value life insurance includes whole life, universal life (including indexed UL), and variable universal life. All provide lifelong death benefit protection if kept in force and build a tax-deferred cash value governed by IRC §72. Access to that value is possible through withdrawals, policy loans, or surrender, but the tax outcome depends on whether the policy is a modified endowment contract (MEC) under §7702A. Premiums for permanent coverage are typically several times higher than term for the same face amount—commonly about 5× to 15×—based on recent market quote data (Policygenius; Forbes Advisor; NerdWallet).

If you want to access funds, you can take partial withdrawals, borrow against the policy, or surrender it for its cash surrender value. For non‑MEC policies, withdrawals are generally treated as a recovery of your cost basis first (FIFO) and are not taxable until they exceed basis; by contrast, MEC distributions are income‑first (LIFO) and taxable to the extent of gain, with a 10% additional tax on taxable amounts taken before age 59½ unless an exception applies (IRS Pub. 525; IRC §72; §7702A). Insurers report taxable amounts on Form 1099‑R (IRS 1099‑R instructions). Early surrenders can also be subject to policy surrender charges that reduce proceeds, particularly in the first years (see consumer/FINRA guidance: NAIC; FINRA). If you’re replacing a contract, a properly structured §1035 exchange can defer recognition of gain. Any taxable gains from withdrawals or surrender are taxed at ordinary income rates up to 37% in 2025, depending on your bracket (IRS 2025 brackets).

How Cash Value Life Insurance Works

Each premium dollar covers policy charges and cost of insurance; the remainder builds cash value and grows tax‑deferred. Growth mechanics differ by product: (1) Whole life credits guaranteed cash values plus potential dividends; several leading mutuals declared 2024 dividend interest rates between 5.75% and 6.34% (e.g., MassMutual 6.10%; Penn Mutual 6.34%; Guardian 5.75%). (2) Universal life (UL) credits a declared rate on the fixed account; with insurer portfolio yields rising to roughly 4.7% in 2023 from 4.1% in 2022, many UL fixed accounts have credited mid‑single‑digit rates (≈4.0%–5.5%)—verify your carrier’s current rate sheet (NAIC; North American current rates). (3) Indexed UL credits index‑linked interest subject to caps, participation rates, and spreads; parameters are periodically reset by carriers and illustration limits are governed by the NAIC’s AG 49‑A/49‑B framework (Milliman on AG 49‑B). (4) Variable UL invests in market‑linked subaccounts; performance is market‑driven and reduced by policy and fund charges (Investor.gov; FINRA). Once value accumulates, owners can make withdrawals (usually tax‑free up to basis on non‑MECs), take loans, apply value to premiums, or surrender. Tax order and reporting follow IRS Pub. 525 and IRC §72.

Because favorable tax treatment comes with conditions, access must be managed carefully. Loans accrue interest and are generally not taxable on non‑MECs while the policy stays in force, but a lapse or surrender with a loan triggers taxable income to the extent of gain and is reported on Form 1099‑R (IRS Pub. 525; 1099‑R instructions). Policy withdrawals reduce cash value and can reduce death benefit depending on design; surrender charges in early years may apply (NAIC consumer guidance). To change contracts without current tax, consider a compliant §1035 exchange. Learn more about the ways you can and can’t use your cash value here.

Types of cash value life insurance policies

Cash value with whole life insurance

• Pros
  • Guaranteed death benefit and guaranteed cash value schedule; potential dividends can enhance value (recent 2024 dividend interest rates include 6.10%, 6.34%, and 5.75% at major mutuals; dividends are not guaranteed) (MassMutual; Penn Mutual; Guardian).
  • Tax‑deferred cash value growth; on non‑MEC policies, withdrawals are generally tax‑free up to basis under FIFO rules (IRS Pub. 525; IRC §72).
  • Access to funds via withdrawals/loans per policy terms; properly designed loans on non‑MECs are typically non‑taxable while the policy remains in force (IRS Pub. 525).

• Cons
  • Premiums are much higher than term for the same face amount—often about 5×–15×—even in today’s rate environment (Policygenius; Forbes Advisor; NerdWallet).
  • Policy can lapse if not funded; while nonforfeiture options exist (e.g., reduced paid‑up/extended term), careful monitoring is essential (NAIC).
  • Early surrenders may incur surrender charges and any gain is taxed as ordinary income; changes can affect MEC testing and future tax treatment (FINRA; IRC §7702A; IRS Pub. 525).

Whole life insurance features level premiums, guaranteed cash values, and non‑guaranteed dividends that reflect insurer experience and interest‑rate conditions. Recent dividend announcements illustrate the rate backdrop (e.g., MassMutual 6.10%, Penn Mutual 6.34%, Guardian 5.75% for 2024), but actual policy crediting depends on your policy series and options like paid‑up additions (MassMutual; Penn Mutual; Guardian).

Cash value with universal life insurance

• Pros
  • Flexible premium payments and adjustable death benefit (subject to funding and corridor rules), enabling tailored accumulation or protection strategies (NAIC).
  • Can use cash value to pay premiums; declared fixed‑account crediting has commonly been mid‑single digits recently (≈4.0%–5.5%), with policy guarantees often around 1%–2% (NAIC; carrier rate sheets).
  • Minimum interest rate is guaranteed on fixed accounts, and some UL designs offer no‑lapse (secondary) guarantees that can keep the death benefit in force if specified premium requirements are met (availability and capital considerations vary by insurer) (NAIC; OSFI LICAT).

• Cons
  • Guaranteed minimums on fixed accounts may be low (often about 1%–2%), and current crediting rates can change over time (carrier rate sheets).
  • Distribution tax rules depend on MEC status: non‑MEC withdrawals are generally basis‑first; MEC distributions are income‑first and may face a 10% additional tax before age 59½ (IRC §72; §7702A).
  • Underfunding and rising charges can cause lapse; surrender charges apply in early years and secondary guarantees require strict premium funding to remain effective (NAIC).

Universal life policies credit a declared rate on a fixed account and, for indexed UL, index‑linked interest subject to caps, participation rates, and spreads. In the higher‑rate environment, insurers’ improved portfolio yields have supported higher declared crediting and larger option budgets, which in turn support stronger caps/participation settings—though actual parameters vary and are constrained by illustration rules under AG 49‑A/49‑B (NAIC; Milliman; North American current rates). Review current rate bulletins and request compliant illustrations to see both current and guaranteed scenarios (NAIC).

Cash value with variable universal life insurance 

• Pros
  • Choose from market‑linked subaccounts (equity, bond, cash‑like), allowing customized risk/return exposure with tax‑deferred growth (Investor.gov).
  • Tax deferral on investment growth inside the policy; potential for higher long‑term returns compared with fixed/declared‑rate designs, depending on markets (FINRA).
  • Cash‑like subaccounts have benefited from elevated short‑term yields; 3‑month U.S. Treasury rates hovered in the mid‑5% range through much of 2024–2025 (FRED DGS3MO).

• Cons
  • Market risk: cash value and death benefit can fluctuate; poor sequences can require additional premiums to avoid lapse (FINRA).
  • Policy and fund charges apply—typical ranges include fund expense ratios ≈0.20%–2.00% and mortality & expense (M&E) risk charges ≈0.60%–1.85% annually, plus admin fees and ongoing cost of insurance (FINRA).
  • Transfer restrictions and surrender charges may apply; loans reduce invested value and introduce loan‑rate/crediting spread risk (Investor.gov).

Variable universal life allocates cash value to separate‑account subaccounts and has no guaranteed crediting. Net results equal market returns minus a stack of charges (fund ERs, M&E, admin fees, COI). Equity proxies have shown low‑double‑digit 10‑year annualized returns in recent dashboards, whereas core bonds are in low single digits; cash proxies remain elevated—context that shaped recent VUL outcomes (S&P Dow Jones Indices; Bloomberg U.S. Aggregate; FRED). Industry sales trends often improve for VUL when equities are strong (LIMRA 2025 sales update).

How to access the cash value in your life insurance policy

The cash value and death benefit are typically separate. You can often make partial withdrawals, subject to policy limits and any surrender charge schedule. For non‑MEC policies, cumulative withdrawals generally follow FIFO rules and are not taxable until they exceed your cost basis; MEC distributions are income‑first and generally taxable, with a 10% additional tax on taxable amounts taken before age 59½ unless an exception applies. Insurers issue Form 1099‑R for taxable distributions and report MEC status on applicable transactions (IRS Pub. 525; IRC §72; §7702A; 1099‑R instructions; NAIC).

Another option is to take out a loan against your cash value. Interest accrues and reduces net growth. Loans on non‑MEC policies are generally not taxable while the policy remains in force, but if the policy lapses or is surrendered with a loan outstanding, the unpaid balance is treated as a distribution and any gain above basis is taxed as ordinary income in that year (reported on Form 1099‑R) (IRS Pub. 525; 1099‑R instructions).

A final option is to use your cash value to pay your insurance premiums rather than paying out of pocket. Monitor funding closely—using cash value for premiums can raise lapse risk if crediting or market performance falls short. Best practice is to request annual in‑force illustrations under current and stress assumptions and adjust premiums or benefits as needed (NAIC consumer guidance).

Bottom Line

Cash value life insurance fits buyers who need lifetime coverage and value tax‑deferred accumulation with access to funds via withdrawals and loans. For pure death‑benefit needs over a set period, term life is typically far cheaper—often about 5×–15× less expensive on monthly premiums for the same face amount (Policygenius; Forbes Advisor; NerdWallet). Today’s rate environment has lifted many UL fixed‑account crediting rates and stabilized some whole‑life dividend scales, while IUL illustrations are governed by AG 49‑B and index crediting parameters are periodically reset (NAIC; Milliman). Be aware of evolving oversight: U.S. regulators are tightening guidance around algorithmic underwriting (e.g., NAIC AI Model Bulletin; Colorado SB21‑169), which affects underwriting programs and disclosures, and global regimes continue to push for clearer value/communication standards (NAIC AI; Colorado DOI; FCA Consumer Duty). Before tapping cash value, know the tax rules under §72/§7702A, consider a §1035 exchange if replacing, and review annually to manage lapse risk, surrender charges, and MEC limits. Taxable gains are subject to ordinary income rates up to 37% in 2025 (IRS).