Table of Contents

Understanding Cash Value in Life Insurance: Definition and Example

By

Julia Kagan

Updated May 04, 2025

Reviewed by

Chip Stapleton

Fact checked by

Vikki Velasquez

Part of the Series

Guide to Life Insurance

How to Get Life Insurance

Life Insurance Basics

Term Life Insurance

Whole Life Insurance

Other Types of Life Insurance

Riders

Raising Money From Your Life Insurance

Taxation on Life Insurance Policies

Definition

Cash value life insurance is a type of permanent life insurance that includes a savings component, allowing policyholders to accumulate cash value over time that can be borrowed against or withdrawn.

What Is Cash Value Life Insurance?

Cash value life insurance is a type of permanent life insurance that includes a savings component. The policyholder can use the cash value for many purposes, including borrowing or withdrawing cash from it, or using it to pay policy premiums.

Key Takeaways

Cash value life insurance combines permanent coverage with a savings component**, allowing policyholders to accumulate funds that can be accessed during their lifetime for various purposes, such as borrowing or paying premiums.
Premiums for cash value life insurance are higher than those for term life insurance** due to the savings element; nonetheless, cash value policies do not expire as term policies do, providing lifelong coverage.
Access to the cash value can be through withdrawals or policy loans**, though withdrawals reduce the death benefit and loans accrue interest. Additionally, using the cash value to pay premiums can eventually eliminate out-of-pocket payments.
Upon the policyholder's death, the insurance company pays out the full death benefit, not including the cash value**, which becomes the property of the insurer, thereby minimizing the insurer’s liability.
Cash value life insurance is beneficial for those looking to build a nest egg**, as it provides a tax-advantaged means of savings; however, potential policyholders should be aware that cash value accumulation often doesn't begin immediately and may incur penalties for early access.

Cash Value in Life Insurance — Investopedia / Xiaojie Liu

Understanding the Mechanics of Cash Value Life Insurance

Cash value insurance is permanent because it covers the policyholder’s entire life. Usually, cash value life insurance has higher premiums than term life insurance because of the cash value element. A portion of each premium payment is allocated to the cost of insurance and the remainder deposited into a cash value account.

The cash value of life insurance earns interest, and taxes are deferred on the accumulated earnings. While premiums are paid and interest accrues, the cash value builds over time. As the life insurance cash value increases, the insurance company’s risk decreases, because the accumulated cash value offsets part of the insurer’s liability.

Real-Life Scenario: Cash Value Life Insurance in Action

Consider a policy with a $25,000 death benefit. The policy has no outstanding loans or prior cash withdrawals and an accumulated cash value of $5,000. Upon the death of the policyholder, the insurance company pays the full death benefit of $25,000. Money accumulated in the cash value becomes the property of the insurer.

With a cash value of $5,000, the insurance company’s real liability is $20,000 ($25,000 - $5,000).

Note

Whole life, variable life, and universal life insurance are all examples of cash value life insurance. Term insurance is not cash value insurance.

How to Access the Cash Value in Your Life Insurance

Policyholders can use the cash value as a living benefit to access funds in several ways.

Withdrawing Cash from Your Life Insurance Policy: Pros and Cons

For most policies, partial surrenders or withdrawals are permissible, though these reduce the death benefit. Some policies allow for unlimited withdrawals, while others restrict how many draws can be taken during a term or calendar year. Some policies limit the amounts available for removal (e.g., a maximum of $500).

Important

If you withdraw more than the amount you’ve paid into the cash value, that portion will be taxed as ordinary income.

Borrowing Against Your Life Insurance: Policy Loans Explained

Most cash value life insurance arrangements allow for policy loans from the cash value. As with any other loan, the issuer will charge interest on the outstanding principal. An outstanding loan reduces the death benefit dollar for dollar if the policyholder dies before repaying the loan.

Using Cash Value for Premium Payments: What You Need to Know

Cash value may also be used to pay policy premiums. If there's enough cash value, the policyholder can use it to pay the premiums instead of paying out of pocket.

Why Consider Cash Value Life Insurance?

Policyholders of permanent life insurance have the ability to borrow against the accumulated cash value, which comes from regular premium payments plus any interest and dividends credited to the policy.

Should I Look Into Buying a Cash Value Life Insurance Policy?

Those looking to build a nest egg over a time horizon of several decades may want to consider cash value life insurance as a savings option, alongside a retirement plan like an IRA or 401(k). Be aware that cash values often don't begin accruing until two to five years have passed. And you may have to wait several years to access the cash value, or pay a penalty.

Are Cash Value Policy Premiums High?

Yes, cash value policy premiums are typically higher than regular life insurance because part of your payment goes toward savings.

What Happens When You Withdraw Cash From Life Insurance?

If you make a withdrawal from the cash value in a life insurance policy, the death benefit will decrease. If you withdraw everything, the policy terminates.

Withdrawing money from life insurance is tax-advantaged in that the IRS considers your withdrawals a return of the premiums you paid for the policy. So you can withdraw that amount of money without paying taxes. Any gains from dividends or interest, however, would be taxed—but these would not occur until after you've withdrawn all your premium payments.

The Bottom Line

Cash value life insurance provides a mechanism for policyholders to accumulate funds for future use. Part of each premium goes into a savings account, allowing the cash value to grow tax-free. This cash can be accessed for a variety of purposes during the insured’s lifetime.

Article Sources

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Allstate. “What Is Cash Value Life Insurance?”
Fidelity. "Cash Value Life Insurance."
Prudential. “A Guide to Life Insurance Dividends Options.”