Cash Value Life Insurance: Is It Right for You?
The cash value in permanent life insurance policies can lead to impressive returns, but it also comes with risks.
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Cash value life insurance is permanent coverage that offers a death benefit and a savings component. Unlike term life insurance, a portion of your premium payment goes toward funding the policy's cash value, which then earns interest. Once you build up enough cash value, you can withdraw or borrow from your policy.
Pros and cons of cash value life insurance
Lifelong coverage.
Cash value earns interest and sometimes dividends.
You can withdraw or borrow money against your policy's cash value.
Policy loans have relatively low net interest rates.
Premiums are usually higher than term life insurance.
Managing policies often requires a hands-on approach.
Unpaid loans can reduce the death benefit paid to your beneficiaries.
What kinds of life insurance come with cash value?
Whole life insurance
A whole life insurance policy guarantees a fixed rate of return on the cash value — typically somewhere between 1% and 4% annually. Policyholders with mutual companies may also earn dividends on a yearly basis. You can take dividends as cash or use them to cover your premiums or boost the policy’s cash value.
Mutual life insurance companies are owned by policyholders and can offer dividends based on their financial performance. Dividends are extra payments that may be given annually to whole life insurance policyholders. While not guaranteed, life insurers pay dividends when they take in more in premiums for the year than they pay out for death benefits and other costs.
Indexed universal life insurance
With indexed universal life insurance, the cash value growth is tied to a stock or bond index, such as the S&P 500. Growth rates may vary but the cash value can’t dip past the policy’s floor, which is usually set at 0%.
Variable universal life insurance
With variable universal life, the cash value is invested in various subaccounts of stocks, bonds or mutual funds. This kind of policy offers the greatest potential returns but comes with the risk of losing cash value if the investments tank.
How cash value policies build value
Did you know…
Term life insurance doesn’t have a cash value component, so you can’t borrow against the policy. It provides temporary coverage for a certain period, such as 10, 20 or 30 years, and pays out if you die within the term. That’s why it’s so affordable, especially for young and healthy people. In general, term life is sufficient for most people.
» Need term life insurance? Compare life insurance quotes
What can you do with the cash value of an insurance policy?
The cash value is a big selling point that insurance agents highlight about permanent life insurance. Just note that it can take years to build up enough cash value to start accessing the money within your policy.
Here’s what you can do with the cash value of a life insurance policy.
Withdraw all the cash value and surrender the policy
This will end the life insurance coverage. In the early years, you’ll likely have to pay a surrender fee to the insurance company. This is because it costs the insurer more to service a cash value policy, and the first 10 or so years of premiums cover these administrative costs.
Make partial withdrawals
If you’re not prepared to give up your coverage, you can withdraw part of your cash value. But any money you choose not to repay will reduce the life insurance death benefit — the payment to your beneficiary when you die.
Borrow against the cash value
You can take out loans for anything you’d like. You’ll have to repay them, though, with interest. If you don’t, the insurer will subtract the outstanding loan amount from the death benefit.
Use it to pay premiums or the cost of insurance
Once the cash value is high enough, you might be able to funnel the money toward your whole life insurance policy premiums. For other permanent policies, you can use the cash to cover the cost of maintaining your policy.
When might cash value life insurance be a good idea?
High-income earners: If you’ve already maxed out contributions to your 401k or other tax-advantaged retirement accounts and you need life insurance, a cash value policy can serve as an additional source of retirement funding and comes with some tax advantages.
Leaving an inheritance: Cash value life insurance can offer a tax-efficient way to transfer large amounts of wealth to future generations.
Estate planning: If your assets exceed estate tax exemptions, your heirs can use a cash value life insurance payout to cover state and federal estate taxes. In 2026, the federal tax threshold is $15 million.
People with lifelong dependents: If you have a loved one who will depend on you for life, such as a child with a disability, cash value life insurance ensures they get a payout.
Freelancers and business owners: People with fluctuating income might want to consider universal life insurance, a kind of cash value life policy that allows you to adjust how much you pay in premiums.
When should you skip it?
You need temporary coverage: If you only need coverage to last until your loved ones can support themselves without it, or until major debts are paid off, term life insurance is probably a better fit.
You’re on a budget: Cash value life insurance is significantly pricier than term life insurance, and you have to be able to commit to paying those high premiums for life.
You prefer to ‘set it and forget it’: Certain types of cash value life insurance may require active account management.
» Does term life work better for you? See top picks for the best term life insurance.
You’ll generally need a trusted life insurance agent to walk you through your permanent policy options. It’s also a good idea to get a second opinion from a fee-only life insurance advisor to see whether cash value life insurance is the right type of policy for you.
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