Cash value life insurance covers a range of policy types. Each type comes with its own benefits and limitations, but they all have a few things in common. First, they guarantee a death benefit payment as long as the insured person keeps up with premiums. Second, they include a “cash value” savings or investment account that adds an extra financial buffer for the policyholder and their family during life. 

If you ever want to access your funds, you can either terminate your policy and receive its cash value or take out a loan on your life insurance’s cash value. In most cases, this type of insurance is more expensive than other similar products, particularly compared to term life insurance.

How Cash Value Life Insurance Works

With a cash value insurance policy, a portion of each premium payment gets deposited (tax-free) into your cash account. How much money gets deposited, and its growth potential over time, depends on the type of cash value life insurance you choose. Once you’ve built up substantial cash value on your life insurance (which usually takes about 15 to 20 years), there are a few different ways you can put those funds to work for you. You can usually take a loan against the account, use it to pay your premiums, withdraw up to a certain percentage or surrender the policy altogether and take the cash value as a lump sum.

Because your life insurance cash account comes with tax advantages, it also comes with strings attached. In other words: Withdrawals aren’t free. You’ll either have to pay them back, surrender part of your policy’s death benefit, or face your insurance lapsing. 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
    • Death benefit is guaranteed
    • Tax benefits for beneficiaries
    • Access to funds without penalty
  • Cons
    • Expensive premiums
    • Policy will lapse if premium is unpaid
    • Maturity for the size of death benefit is usually when you turn 100

Whole life insurance comes with a cash value component that earns a fixed interest rate over the life of the policy. Premiums are also level-set (meaning you’ll pay the same amount every month, as long as the policy stays in force), so your cash value returns are more or less guaranteed.

Cash value with universal life insurance

  • Pros
    • Flexible in how much you save
    • Can use cash value to pay premiums
    • Minimum interest rate guaranteed
  • Cons
    • Minimum rate may be lower than other policies
    • Earnings are taxable when you take out funds
    • Problematic if you live past the maturity date

Universal life insurance is more flexible than whole life. Policyholders usually have some control over the size of their premium payments, which means they can decide to some extent how much money gets deposited into the cash account. Universal life policies invest the cash into various portfolios. The returns on your policy will depend on how those investments perform.

Cash value with variable universal life insurance 

  • Pros
    • Choose your group of investments
    • Tax deferral on investment growth
    • Could earn higher returns
  • Cons
    • Risk of investment loss
    • Will pay management fee on invested funds
    • Fund transfers may have restrictions

Variable universal life diverts the policy’s cash value into a variety of investment accounts. Variable life insurance has the potential to offer greater growth compared to other options, but it also presents a bigger risk to the policyholder’s investment because returns are not guaranteed.

How to access the cash value in your life insurance policy

The cash value portion of your insurance policy and the death benefit are typically separate. That means you can access your funds in a few different ways. In many cases, you can make a partial withdrawal on your cash value. You may have to pay taxes if the money you initially put into the account wasn’t taxed. Different policies have different rules about how frequently you can withdraw funds and how much you can take out at one time.

Another option is to take out a loan against your cash value. You’ll pay interest to your insurer. If you happen to pass away with an outstanding balance, the remaining loan principal will be deducted from the death benefit your beneficiaries are supposed to receive. 

A final option is to use your cash value to pay your insurance premiums rather than paying out of pocket.

Bottom Line

Cash value life insurance is ideal for people who want life-long coverage. If you only want to be covered during a certain period of time, term life insurance may be a better option. Cash value life insurance provides a balance between leaving your loved ones with a death benefit after your passing and saving money with either fixed or variable terms. It also gives you a financial safety net in case you ever want to make a withdrawal or take out a loan from your cash value account.

About the Authors

Lauren Ward

Lauren Ward Contributing Writer

Lauren Ward is a personal finance writer who regularly covers consumer insurance products. Her work has appeared in a variety of online publications, including Bankrate and The Simple Dollar. She graduated from Georgetown University with a BA in Japanese.