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What Is Cash Value Life Insurance?

Updated: October 2019

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.


Video Transcript

[Whistling]

[Voiceover] You're probably familiar with how life insurance works. You can typically choose the amount your beneficiaries would receive if you pass away. But that's not the only benefit some plans offer.

Cash value is a feature specific to permanent life insurance, one of the two major types of life insurance policies. A portion of each payment you make to a permanent life insurance policy goes toward insuring your life, and the other portion goes toward building up cash value.

As you pay your premiums, the cash value portion earns interest. Then, you may be able to withdraw or borrow against it in case of an emergency.

So how can you access your policy's cash value? One way is to make a withdrawal. Another way is with a loan. You may be able to borrow up to the cash value amount on your policy.

Finally, you may be able to use your policy's cash value to help pay premiums. Be sure you understand the consequences of each of these choices.

Loans or partial withdrawals may reduce your policy's death benefit, increase the possibility of policy lapse and result in a tax liability.

Need help? Discuss the options of your cash-value policy with a life insurance agent.

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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, however, 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.

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This content is for informational purposes only and may not be applicable to all situations.

Please note that Allstate or its agents and representatives cannot give legal or tax advice. The brief discussion of taxes on this page may not be complete or current. The laws and regulations are complex and subject to change. For complete details consult your attorney or tax adviser.

1Partial withdrawals and surrenders from life policies are generally taxed as ordinary income to the extent the withdrawal exceeds your investment in the contract, which is also called the "basis." In some situations, partial withdrawals during the first 15 policy years may result in taxable income prior to recovery of the investment in the contract. Loans are generally not taxable if taken from a life insurance policy that is not a modified endowment contract (MEC). However, when cash values are used to repay a loan, the transaction is treated like a withdrawal and taxed accordingly. Unpaid interest on loans is added to the loan principal, there by increasing the total debt on the policy. The combination of an increasing loan balance and deductions for contract charges and fees may cause the policy to lapse, triggering ordinary income tax on the outstanding loan balance to the extent it exceeds the cost basis in the policy. Loans, if not repaid, and withdrawals reduce the policy's death benefit and cash surrender value.

Life insurance offered through Allstate Life Ins. Co. & Allstate Assurance Co., 3075 Sanders Rd, Northbrook IL 60062; American Heritage Life Ins. Co., 1776 American Heritage Life Dr., Jacksonville FL 32224. In New York, life insurance offered through Allstate Life Insurance Company of New York, Hauppauge NY. ©2018 Allstate Insurance Company, Northbrook, IL.

Securities offered by Personal Financial Representatives through Allstate Financial Services, LLC (LSA Securities in LA and PA). Registered Broker-Dealer. Member FINRA and SIPC. Main Office: 2920 South 84th St., Lincoln, NE 68506, 877-525-5727. Life insurance issued by Allstate Life Insurance Company, Home Office, Northbrook, IL; Allstate Assurance Company, Northbrook, IL. In New York, Allstate Life Insurance Company of New York, Hauppauge, NY. Check the background of this firm on FINRA's BrokerCheck website.
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