What Is the Cash Value of a Life Insurance Policy?

Definition and Examples of Life Insurance Cash Value

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Cash value is an asset that can build up within a permanent life insurance policy. That money accumulates as you pay premiums and may even be available for withdrawal. Learn what cash value is, its purpose, and the basics of how it works.

What Is the Cash Value of a Life Insurance Policy?

Cash value is the amount of money inside a permanent life insurance policy. It is the accumulation of funds that remains after your premiums pay for policy fees and expenses, including the cost of insurance. Increases in the cash value over time can help offset increased insurance costs as the insured person gets older.

Term life insurance policies (insurance purchased for and intended to expire after a specific number of years) typically do not have a cash-value component.

How Cash Value for Life Insurance Works

When you pay premiums on a permanent insurance policy, a portion of that money goes into what is referred to as the cash value of the policy. If all goes well, your cash value grows over time. The rate of growth (or loss) depends on the type of policy you have and how the cash value is invested. 

Permanent Policies

Cash value is a feature of only permanent life insurance policies, not term insurance policies. For example, you will find cash value inside the following types of life insurance, each of which invests the cash-value component differently:

  • Whole life
  • Universal life
  • Variable life
  • Indexed life

You can also access the cash value either through withdrawals directly from the policy’s cash value or as policy loans against the cash value. 

Permanent insurance policies typically require higher premiums in the early years than term insurance policies. With permanent insurance, you need to cover the insurance costs and contribute extra to build up the cash value.

How It Works

With a permanent life insurance policy, you often start with a premium that’s bigger than the amount needed to provide pure life insurance protection. For example, whole life insurance (a type of permanent insurance) may feature a level premium, which stays the same each year. In the early years, any excess money from your premiums goes into your cash value, where it can be invested. As you age and the cost of insurance increases, your cash value and any earnings help pay for the policy.

Earnings and Losses

Depending on the type of policy you have, your cash value can gain or lose money. Some policies pay a fixed rate of interest, while others, like variable life insurance, allow you to invest your cash value in financial instruments like stocks and bonds.

There is no government guarantee on the performance of a life insurance policy. Any promises are dependent on the insurance company’s financial strength and ability to deliver.

Type of Insurance  Type of Investment
Whole life Typically a fixed interest rate
Universal life Interest earnings that may vary depending on how the insurance company’s investments perform
Variable life Securities that can gain or lose value as a result of movements in financial markets
Indexed life Complex formulas that often measure market index movements over set periods

Cash Value vs. Face Value

Cash Value

The cash value of a life insurance policy is the accumulated balance inside the policy. That balance results from premium payments that exceed the cost of insurance, and the balance can grow or shrink, depending on how the policy performs.

Cash value is available to the policy owner, who can choose to surrender the policy, take withdrawals, or borrow against the cash value. However, those actions may result in a loss (or reduction) of coverage, as well as potential tax consequences.

Face Value

The face value is the death benefit, or the amount beneficiaries receive if the insured person dies while a policy is in force. That amount is often the amount you choose when you apply for and purchase life insurance coverage.

Cash Surrender Value

When you have cash value in a life insurance policy, you might assume that you can cash out and receive 100% of the balance. But your insurer might impose surrender charges, which reduce the amount you walk away with. To get an accurate idea of how much is available, ask the insurer for the cash surrender value, which is the amount you’ll receive after the insurer deducts surrender charges.

Accessing the cash surrender value effectively cancels the policy. If you choose instead to access the cash value via a loan against the policy or a direct withdrawal, you can keep the policy in force and thereby retain the death benefit for your beneficiaries. (However, the death benefit could be reduced in some circumstances.)

Surrender charges can last 10 years or more, so be sure to read your policy carefully if you expect to use the cash value. Taxes can potentially reduce the amount available to you even more.

Does Term Life Insurance Have Cash Value?

Term life insurance typically does not include a cash value—it’s a “pure” form of life insurance that offers a death benefit without any investment component. If your primary goal is to protect loved ones against the untimely death of a family member, you might not need a policy with cash value.

Key Takeaways

  • Permanent life insurance policies typically have a cash value, which is an account that can gain or lose value inside the policy.
  • The cash value is the accumulation of funds that remains after your premiums pay for policy fees and expenses, including the cost of insurance.
  • Tapping your cash value may have consequences, such as a loss of coverage, surrender fees, or tax liability.
  • Term insurance, which typically lasts for a set number of years, generally does not have cash value.