What Is Cash Value Life Insurance?

In this article...
  • Learn what cash value life insurance is and how it works. Explore the pros and cons of this type of life insurance, so you can decide if it's right for you.

The primary reason to purchase life insurance is to provide money for your loved ones in the event of your death, but that's not the only function that a policy can have. Cash value life insurance lets you build up savings over time. By learning what it is and how it works, you can decide whether it's the best type of policy for your needs.

What Is Cash Value Life Insurance?

Like other types of insurance, cash value life insurance pays a death benefit to the beneficiaries you name when you die. Each month you pay a premium in exchange for the promise of this financial protection for your loved ones. With cash value life insurance, a portion of that premium goes into a cash account. The value typically begins growing after the first couple of years of a policy and continues to increase over its life. You earn a small amount of interest on the money.

Do You Lose Cash Value Life Insurance?

No, cash value life insurance is permanent insurance. Provided you continue to pay your monthly premiums, the coverage remains in effect throughout your life.

Do Your Beneficiaries Get the Cash Value of Your Life Insurance?

No, any cash value that remains becomes the property of the insurance company when you die. Your loved ones receive the full amount of the death benefits instead.

What Can You Use the Cash Value of Life Insurance For?

 You can use the cash value of a life insurance policy to:

  • Obtain a policy loan. This type of loan agreement uses the value of life insurance as collateral. Lenders usually don't consider income and credit score, and you can often get the money quickly. If you take out a policy loan, you don't have to make payments unless you wish to. The lender will simply deduct the loan balance from the death benefit.
  • Pay for premiums. As the cash value grows, you may be able to stop making premium payments and instead use the cash value to keep the policy in effect. Often, older adults have less income available for premium payments. The cash value makes it possible for seniors to use their money to cover other expenses.
  • Fund long-term care. If you require long-term care in an assisted living or nursing home, the cash value of your life insurance can help cover these expenses.
  • Supplement retirement income. You can use the cash value of your account to supplement income from a pension, Social Security or retirement plan.

Benefits of Cash Value Life Insurance


  • Tax deferral. You don't pay taxes on cash value earnings until you make a withdrawal.
  • Access to loan funding. Even people who may not otherwise qualify for a personal loan can usually get access to funds through a policy loan.
  • No expiration. A cash value life insurance policy doesn't expire. Once you have coverage in place, it remains in effect until you die.
  • Fixed premiums. Many cash value life insurance policies have fixed premiums that remain the same over the life of the policy. This differs from term life that may require you to pay a higher premium when you renew.

Drawbacks of Cash Value Life Insurance

Some drawbacks of cash value life insurance include:

  • Higher premium payments
  • Rigorous underwriting processthat usually includes a medical exam
  • Lower interest rates than other investments
  • Savings growth may not keep up with the rate of inflation

Does Withdrawing Cash Value Affect the Death Benefit?

If you only take out the interest earned on the cash value, the death benefit is unlikely to be affected. Should you withdraw more than just the earnings, the life insurer will usually lower the death benefit payout. You may also need to pay taxes on the money.

Do I Get Money Back If I Cancel My Life Insurance?

Whether you can get money back if you cancel cash value life insurance depends on when you cancel.

Free Look Period

Laws require all life insurance policies to have a free look period. The length of the period varies, but it's usually at least 10 days from the effective date of a life insurance policy. If you cancel during the free look period, the life insurance company must refund any premiums that you already paid. You won't get any additional money.

Surrender Period

The first few years of a cash value life insurance policy are known as the surrender period. During this time, your policy has not accumulated much cash value. If you cancel, the insurance company loses money on administrative costs. As a result, the insurer may not pay you any money if you cancel during this period. Some insurers do provide a small cash surrender value.

Post-Surrender Period

Once the surrender period passes, you can receive money if you cancel your policy. The insurer will deduct a surrender fee from the total value of your cash account. Generally, the amount of this fee goes down every year, making it better to wait to cancel your life insurance if possible.

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