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Life Insurance Cash Value - Explained


Cash value refers to the sum of money that can be invested in a cash-value-generating life insurance policy or an annuity. Cash value builds when the insurance provider distributes your premium to bonds or other investments. One similarity between cash value in permanent life insurance vs annuity is that it grows over the policy's existence.

You can use the cash value of your life insurance policy to fund your retirement, or you can withdraw some of it at once and surrender it. When you cash on your insurance policy or annuity, you surrender it, which can result in surrender charges. The remaining balance, minus surrender charges, is the "cash surrender value." Note that cash surrender value in annuity vs life insurance differs. If you have owned an annuity for a long time, you may have to pay various charges to get your cash value. These may be charged based on your age and whether you want to make a partial or full surrender. An annuity's surrender value is the total of all its payments minus any interest and prior withdrawals.

Meanwhile, in life insurance, your insurer will first look at the current cash value in your account to determine the final surrender value. They may then subtract the various fees and accumulated amounts to generate a final figure. Withdrawals that exceed the policy's premium are usually taxable. You can also use a permanent life insurance policy to build a tax-free savings account. The higher premiums and other features of permanent life insurance policies make them more expensive than term insurance. However, the cash value can help the policy pay for itself over time.

How does cash value life insurance work?

A cash value is a portion of a life insurance policy premium payments allocated to a savings component. Both universal and whole life insurance policies pay fixed interest rates on its cash value. The cash value can grow differently depending on the market's performance. You can use the cash value component of your policy in different ways. For instance, a life insurance policy with cash value can be used to pay death benefit. If your policy’s cash value grows to the same level as your death benefit, your insurance company will pay out the death benefit. It can also provide a zero-cost policy where your insurance premium payments will be made from the policy’s built up cash value. With a cash value life insurance, you can lower your premium payments while preserving your policy’s cash value. It is important to know that this method will only work if your policy allows it.

Example of Cash Value

A life insurance policy with a cash value of $5,000 and a death benefit of $45,000 would have a total payable value of about $50,000. However, since the policy's cash value is $5,000, the liability cost of the life insurance provider will be $40,000. The policy’s insurer will get the money from the cash value as part of its property.

Types of Cash Value Life Insurance

  1. Whole life insurance policy: One of the most common kinds of permanent life insurance with a cash value policy, but it does not require the policyholder to make any decision regarding their investments. Instead, the company will pay a steady rate of return on the cash value. This type of insurance can grow faster than other types of insurance if the dividends are reinvested annually. Whole life policies are typically expensive due to their guaranteed nature.
  2. Guaranteed life insurance policy: Unlike other types of insurance, guarantee life insurance does not require medical examinations or questions about your health. It can be utilized for burial, final or funeral expenses. Although it has a cash value, the small coverage can limit its potential value.
  3. Universal life insurance: Although most universal life policies have a cash value, building a solid financial cushion is not always possible. The policy can help you accumulate more cash but also lose money. This insurance policy can allow the policyholder to adjust the benefits and premiums according to their needs.
  4. Variable life insurance: A variable life insurance product can provide access to various investment tools, but it can also be risky due to how your cash value can change. However, this might be a good alternative if you are comfortable taking risks and planning to grow your cash value
  5. Indexed life insurance: An indexed life insurance product typically offers a higher rate of return. The policy’s cash value is also affected by the index that it uses to calculate its growth. Although it can have various risks, an indexed policy can still provide a guaranteed minimum interest rate.

How Can I Access Money From The Cash Value of My Life Insurance Policy?

  • Take out a loan against the cash value
  • Withdraw funds from the cash value
  • Surrender the policy for cash

Benefits of Cash Value Life Insurance

  • The cash value component of a life insurance policy provides its customers with a living benefit, which they can withdraw at any time during their lifetime.
  • A whole life insurance policy is a type of financial product that allows its owner to receive dividends, the earnings of the insurance company are then distributed to the policyholder yearly. Various guaranteed payouts are also determined from the beginning in these types of policies.
  • Besides regular payours, cash value life policies can also purchase additional paid up additions. This can increase the beneficiary's death benefit.
  • Different types of life insurance options can also be customized to provide additional policy features and coverage. One of these is an accelerated death benefit, where the insured can access their benefit even when they are still alive.
  • One of the most important advantages of cash value is its ability to provide tax free death benefits to the beneficiaries. Since average life insurance payouts can be huge, this benefit is very significant. In addition, this type of insurance can also help the policy owner maintain a cash value that is outside of tax.

Disadvantages of Cash Value Life Insurance

  • Term life insurance is typically cheaper than cash value insurance.
  • Some life insurance policies can take a long time to build a considerable cash value. With a few policies, you can start with a quick cash flow. You can then work with an agent to find the best life insurance solution for your needs.
  • Your life insurance policy’s cash value will typically revert to the company upon your death. Your beneficiaries will get your death benefit minus any withdrawals or loans. Some policies, however, will pay out the cash value to your loved ones, and you may pay more.

How To Use Life Insurance to Build Wealth?

One of the main reasons why people accumulate wealth is the desire to pass it on to their children. Many people with a high net worth know the advantages of using life insurance to boost their estate. It can be used as a financial security measure or an asset for tax purposes. There are various reasons why wealthy individuals may want to consider it even though it is not something they can easily benefit from.

One of the most important factors people should consider when investing in life insurance is the amount of money they can expect to receive from the policy. This type of money wealth life insurance can help provide security to the future of the surviving family members. People can sell their old life insurance policy and use the money to invest in other assets. Permanent life insurance policies have cash value components, which can provide them with tax benefits. This type of insurance is designed to provide cash flow of income and by combining a leveraging strategy and a fully funded life insurance policy can provide an excellent retirement strategy alternative, A leveraged cash value investment is a type of asset that provides a steady income stream and is similar to bonds but with higher average annual returns.

Most Life insurance policies typically have cash value components that provide a steady income stream. People can pay their premiums using this growing asset, while others can borrow against it. An example of such life insurance is an indexed universal life (IUL). This type of policy provides a long term cash value. An indexed universal life can last for up to 121 years. Unlike other types of insurance, it can build a significant cash value over a decade and it does not invest directly in an index fund. Instead, it uses the performance of the S&P 500 to determine the cash value of the policy. An indexed universal life can grow its cash value by 9% if the S&P 500 grows by 9% throughout the year. It has flat ceilings and growth floors designed to protect the policyholder from losses if the market falls.


If an individual has $100,000 in cash value in an IUL and $100,000 in a 401(k), the gains and losses from the market index will match:

End of 1st Year, the market grows by 7%

  • IUL – $107,000
  • 401(K) – $107,000

End of 2nd year, the market dropped by 12%

  • IUL – $107,000
  • 401(k) – $94,160

End of 3rd year, the market grows by 15%

  • IUL – $123,050
  • 401(k) – $108,284

The IUL is growing steadily and is protected against losses that can occur during bad market years. It is also tax-free. With an IUL, you can have the cash value grow regardless of how much you borrow against it. The total amount will also still grow even if you borrow against your policy. Likewise, whole life insurance can provide a steady income stream as long as it is properly structured. This type of insurance cash value can be used to borrow money to pay for expenses like college tuition.

Regardless of your wealth accumulation, life insurance can provide various benefits. Before considering a life insurance policy, you should consult a New Jersey licensed life insurance agent to help you thoroughly research the different options available to you. Doing so will help you identify the best company for your needs.

How to Build Cash Value in Life Insurance?

You can build your cash value in life insurance through:


Overfunding life insurance (OLI) policies is when an insured pays more than is required. This is a strategy that involves overfunding a person's dividend insurance policy. An overfunded life insurance policy is a popular choice for people who want to build substantial savings. It can be used to fund a tax-favored savings account. An overfunded life insurance policy is commonly referred to as a life insurance retirement plan (LIRP). It provides a high cash value and tax-advantaged asset protection.

Most permanent life insurance policies have a cash value component. If you pay more than the minimum, the policy's cash value will increase. Overfunding your policy allows you to contribute more to the cash value. You usually have to pay a certain amount each year or month to maintain the policy's existence.

The following are the benefits of overfunded life insurance:

  • You can grow your cash value account's funds tax-free with a permanent life insurance policy, such as indexed universal life (IUL), variable universal life (VUL), or whole life insurance (WL). This allows you to build more significant money for your long-term savings goals.
  • Life insurance policies that WL issues can provide annual dividend payments. These can increase the policy's cash value and death benefit.
  • IUL policies allow you to move your cash value into various sub-accounts linked to stock market indices like the S&P 500. VUL, on the other hand, offers subaccounts that invest in various securities.
  • Unlike retirement plans, OLIs do not have annual caps on the amount of cash you can contribute. The only restriction is that the excess cash you can add to the policy over a certain period must follow certain rules. This ensures that the policy's tax-free status remains intact.
  • You can withdraw a portion of your OLI or life insurance loan on a tax-free basis until the withdrawals exceed the policy's contributions. This is because policies are first-in, first-out types of insurance.
  • Unlike traditional retirement plans, OLIs do not have government-imposed penalties for withdrawing funds. They can be taken out for any reason without penalty.
  • OLIs are also more secure than traditional retirement accounts and investment trusts. They can provide financial security against legal claims and creditors.
  • Aside from building up funds for retirement income, OLIs can also provide a tax-free death benefit transfer. This allows the policy's beneficiaries to receive the benefits upon the insured's death.
  • OLIs can also provide a living benefit known as a disability waiver, which can protect against incurring financial loss caused by injuries and illnesses that prevent you from working.
  • OLIs can also provide living benefits to help individuals with chronic conditions. These can allow them to access a portion of the policy's death benefit.
  • Existing life loans or insurance policies are not subject to credit checks. This means that they do not appear on your credit card statements.

Some of the drawbacks of an overfunded life insurance policy include the following:

  • They come with higher upfront fees compared to term life insurance. However, they offer various benefits such as tax-deferral and loss limitation. As the cash value of your account increases, it helps decrease the risk of the insurance company because the accumulated value helps offset the company's liability. This makes OLI policies ideal for people looking to set aside a significant amount of money over a long period.
  • To avoid a policy lapse, you must regularly pay the premiums for your life insurance. If your policy lapses, it will be canceled, and you will be liable for taxes on the borrowed money.
  • Some life insurance policies funded by VUL may have a surrender fee that can be charged if you withdraw too much money from the plan in the first few years.

Some people may benefit from overfunding a life insurance policy, like high net-worth individuals, such as corporate executives and business owners. Overfunding life insurance can be a great way to preserve their wealth. However, this strategy may not be the best choice for everyone. Consult with a financial advisor and a New Jersey-licensed life insurance agent to determine if this is the right move for you.

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