What is cash value life insurance?

Last updated: September 2021

Cash value life insurance is a type of permanent life insurance that includes an investment feature. Cash value is the portion of your policy that earns interest and may be available for you to withdraw or borrow against in case of an emergency.¹

The following types of permanent life insurance policies may include a cash value feature:

Term life insurance does not offer the cash value feature.

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How does cash value life insurance work?

Some permanent life insurance policies offer two features:

  • Death benefit, the amount that's paid out to beneficiaries when the insured person passes away. This is often referred to as the "face value" of your policy, or the amount of life insurance coverage you purchased (for example, a $500,000 whole life insurance policy).
  • Cash value, an additional feature that might make your policy more valuable, because you may be able to access the money while you're still alive.1

With a cash value life insurance policy, a portion of each premium you pay goes toward insuring your life, while the other portion goes toward building up a cash value. The cash value portion of your policy accrues tax-deferred interest. How the money earns interest depends on the type of permanent life insurance policy you purchase.

How can I withdraw cash value from life insurance?

Depending on the type of life insurance policy you have, here are four ways you may be able to access its cash value:

  1. Make a withdrawal
  2. Take out a loan
  3. Surrender the policy
  4. Use cash value to help pay premiums

Withdrawing money from your cash value policy¹

You may be able to make a tax-free withdrawal from your permanent life insurance policy. But, if your withdrawal exceeds the amount you've paid so far into the cash-value portion of your policy, it'll be taxed as income. Also, keep in mind that withdrawing your cash value funds reduces the death benefit that's paid out to your beneficiaries when you pass away.

Taking out a loan on your policy¹

You can typically borrow up to the cash value on your policy. This may include the portion of your paid premiums that have been designated for the cash value account, along with any accrued interest those funds have earned. According to the American Institute of CPAs, the loan isn't considered taxable income. If you die before you repay the loan the outstanding amount is subtracted from your death benefit. Regardless, until you pay the loan back, your debt is accruing interest, which can decrease your policy's potential death benefit.

Surrendering your life insurance policy for its cash value

A surrender is essentially a cancellation of your policy (you'll no longer be covered by life insurance). When you surrender your life insurance policy, your equity is the amount you've paid into the cash value portion of your account plus accrued interest. However, your insurer may subtract funds for any loans or unpaid premiums on the policy. And, you may be charged additional "surrender fees," which could further reduce your policy's surrender value, according to Investopedia. Finally, you could also be charged income tax on the money you receive from surrendering the policy.

Using cash value to pay premiums

If you're short on cash, you may be able to use the cash value in your policy to help pay your life insurance policy's premium. Check with your agent to see how this feature would work for your specific policy. Remember, though, if you deplete the funds in the cash value account entirely, it can cause your policy to lapse, which would end your life insurance coverage altogether.

Having emergency savings on a life insurance policy can be a source of comfort. But, since personal situations are unique, and the details of accessing cash value funds are complex, it's a good idea to talk with an insurance agent to help you decide what option might be best for you.