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Many permanent life insurance products have a savings component called cash value. These products are often referred to as cash value life insurance. Whole life insurance, universal life insurance, and variable life insurance are examples of types of life insurance that include a cash value feature.

Where does the cash value come from?

When you pay your permanent life insurance policy’s premium payment, a portion is deposited into the cash value account. This amount earns interest and slowly grows over time.

Whole life insurance is the least risky type of permanent cash value life insurance. The guaranteed cash value grows at a contractually set rate of growth. Dividends are added to the cash values if it is a participating policy. The policy’s guaranteed cash value, if left untouched, is designed to equal the face amount once the policy reaches maturity—typically when the insured individual reaches age 100.

graph showing how the death benefit and cash value in a whole life insurance policy works

Elements of a Whole Life Insurance Policy

Variable life insurance has no guarantees of either interest rate or minimum cash value. Those who purchase a variable life insurance policy need to be comfortable with daily portfolio fluctuations. The cash value in variable life insurance has the potential to grow faster than whole life but there’s higher risk involved. Policyowners are able to choose their investment options (between stocks, bonds, treasury or money market funds) so they bear the brunt of this risk.

Universal life insurance has a set guaranteed interest rate and a current interest rate. The cash value grows at the higher of the two. There is also a guaranteed mortality rate and a current mortality rate. Policies use the lower of the two. The cash value growth therefore can fluctuate based on the company’s investment earnings and mortality costs.

When you pay your permanent life insurance policy’s premium payment, a portion is deposited into the cash value account. This amount earns interest and slowly grows over time.

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What does cash value do?

Permanent life insurance policies have essentially two parts: the insurance protection (face amount) and the cash value. Many of these policies have level premiums. In the early years of the policy, a good portion of the premium goes to the cash value because the actual cost of insurance for a younger individual is less expensive. As you get older, the amount that has been accumulated in the cash value pays for the now more expensive cost of insurance protection.

The insurance company is able to offer permanent life insurance with level premiums to so many people because they are able to invest a portion of these premiums. These investments help the insurance company make a profit in addition to being able to pay death benefit claims.

If desired, the policyowner has access to the cash value account via policy loans and withdrawals. But if the policyowner takes advantage of this, it means the insurance company has less money to invest. Therefore, the policyowner sees consequences such as reduced dividend payments (if the policy is participating) and a slower growing cash value account. It’s also possible that the cash value is reduced to such a low amount that the policy will be forced to terminate or the policyowner will need to pay higher premiums.

How do policyowners access the cash value?

It’s important to note that with level death benefit universal life policies and non-participating whole life permanent life insurance policies, the cash value can only be accessed while you are alive. The cash value does not get added to the death benefit when you die. If cash is needed, owners can access their life insurance policy’s cash value through policy loans and withdrawals.

Participating whole life policies provide the death benefit plus the dividends (if they are not taken out) at death. Universal life policies with an increasing death benefit provide the face amount of death benefit plus the cash values at death.

Policy Loans

A policy loan accrues interest like a typical loan. Typically up to 90% of the cash value can be borrowed against but if the balance and accumulating interest ever exceeds the policy’s total cash value then the policy will terminate.

You are not required to pay back the loan while you are alive, but the balance will continue to accrue interest. If you do not pay it back, the balance will be taken from your policy’s death benefit when you die. This reduces how much your beneficiaries receive.

Partial Withdrawals

You can make partial withdrawals from the cash value account in your policy. The amount you have paid into the policy (total premium amount thus far) is the maximum amount you can withdraw tax-free. Any amount over the cumulative premiums can be taxed.

Any partial withdrawal cannot be paid back. It’s permanently subtracted from the cash value and the death benefit. This means there is now less cash value left to earn dividends, accumulate, and borrow against.

Full Withdrawal (Policy Surrender)

You can take out all the money in your cash value account through a full withdrawal, but this then terminates your policy. This act is called a policy surrender.

The surrender value is your cash value minus any applicable surrender fees and outstanding policy loan balances. This surrender fee is determined by how long the policy has been active. It typically begins at 100% of the value for the first year and steadily declines until it disappears altogether after 10 or 20 years. After this period of time, you can surrender the policy with no fee.

Many insurance companies do not grant cash surrenders until after a certain number of years have passed, typically three years. If the cash surrender value is more than the total amount of premiums you’ve paid, the difference is considered income and taxed.

Is cash value life insurance worth it?

Most people don’t need permanent life insurance. Term life insurance is much more affordable and can provide the right amount of protection for families.

If you have a sizeable estate, a permanent life insurance policy is beneficial. The life insurance benefit can provide money to pay off estate taxes. If you have a high income and have already maxed out other tax-deferred accounts then permanent life insurance may be a wise decision. If you have a dependent who will rely on you their entire life (and need care even after you’re gone) then a permanent life insurance policy may be necessary.

Here at Quotacy we mainly advise and offer term life insurance, but if you’re interested in permanent life insurance we can help. Talk with one of our advisors to find out if permanent life insurance is a good choice for you and they can help you decide what type of permanent life insurance to buy.

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About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Writer, Editor, and Co-Host of Quotacy’s Q&A Friday YouTube Series

Natasha writes and edits content and is co-host of Quotacy’s YouTube series. She is also working toward her Chartered Life Underwriter (CLU) designation. When not working or studying, you’ll find her throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on.