Cash Value, Explained.
Cash value is one of the features that makes permanent life insurance different from term coverage.
It can build over time, provide access to money while you are alive, and become another source of financial flexibility when a policy is properly designed and maintained.
Key takeaways
- Cash value is money that can build inside certain permanent life insurance policies.
- The way cash value grows depends on the type of policy and the policy's contract.
- Cash value may be accessed during your lifetime through policy loans or withdrawals, subject to the policy terms.
- Cash value can give a permanent life insurance policy a purpose beyond the death benefit.
What Is Cash Value?
Cash value is a pool of value that can build inside certain permanent life insurance policies while the policy is in force.
Your premium does more than one job. Part of it helps pay for the cost of insurance and the expenses of the policy. The remaining amount contributes to the policy’s value according to the policy’s design. Over time, that value can grow based on the type of policy and its contract.
Whole life, universal life, and indexed universal life can all build cash value, but they do not all build it in the same way. What each one guarantees, how each one credits growth, and how each one is funded are different conversations, and the contract is what settles them.
The short version
Cash value is value that belongs to the policy and can build inside it while the policy is in force.
More Than a Death Benefit.
Traditional life insurance is often thought of only as money paid to your family after you die. Permanent life insurance can do more.
The death benefit is still an important part of the policy, and for many people it is the main reason the policy exists. Cash value adds another layer: a source of financial flexibility while you are alive.
Depending on the policy and how it is designed, cash value may be used to:
None of these happen automatically. Cash value does not accomplish anything on its own.
What it can do depends on the type of policy, how it is funded, how it is structured, and how it is managed over time. Two policies with the same premium can behave very differently because of design decisions made at issue. That is why the design conversation comes before the product conversation.
How Does Cash Value Grow?
The answer depends on the type of permanent policy. These are three of the main categories, and they do not accumulate the same way.
Whole Life
Cash value generally builds according to guarantees and other policy features established in the contract. The schedule is set when the policy is issued, which makes whole life the most predictable of the three.
Universal Life
Cash value is affected by premiums, policy charges, interest credits, and the policy's design. The flexibility that makes universal life adaptable is the same flexibility that means the outcome depends on how the policy is funded and managed.
Indexed Universal Life
Cash value can receive interest credits based in part on the performance of selected market indexes, according to the policy's specific crediting strategy. Caps, participation rates, and a floor determine how much of that index movement is credited.
Worth being precise about
With an indexed policy, the policy owner does not directly invest in the index. The index is used to determine how interest may be credited to the policy.
That distinction matters. There is no account holding shares of an index. The policy credits interest by a formula the contract defines, and that formula is where the caps, the participation rate, and the floor live.
Premium Paid and Cash Value Are Not the Same Number.
The amount you have paid in premiums and the policy’s current cash value are not necessarily the same thing. They are two different figures, and understanding why is one of the more useful things a policy owner can know.
Several things sit between the two: the cost of insurance, policy expenses, surrender charges, any loans or withdrawals that have been taken, and the policy’s specific design. Each of those pulls on the number in its own way, and how much depends entirely on the contract.
This is why a policy illustration and the actual policy contract matter so much. The illustration shows what the designer expects the policy to do under a set of assumptions. The contract states what the carrier is obligated to do. When those two are read together, you can see the real picture. Different policies are designed differently, so the pace of accumulation is not something to generalize about.
What that means in practice
You Can Use It While You’re Alive.
There are two primary ways cash value may be accessed. They behave differently, and the difference is worth understanding before you use either one.
POLICY LOANS
A policy loan allows the policy owner to borrow against available policy value. The loan generally accrues interest according to the policy terms. The carrier charges that interest, and it accrues against the policy until it is repaid.
WITHDRAWALS
A withdrawal removes value from the policy. Unlike a loan, it is not repaid.
Cash value can create access to money, but access should be planned carefully.
What About Taxes?
Cash value growth inside life insurance is generally tax-deferred under current federal tax rules.
Properly structured policy loans can generally provide access to policy value without current income tax while the policy remains in force and applicable requirements are satisfied. That is the mechanism people are describing when they talk about tax-advantaged access to cash value.
This is not a blanket promise of tax-free money. The favorable treatment depends on the policy staying in force, on the structure of the access, and on rules that can change. There are specific circumstances where it does not hold.
Where the treatment can change
ABNORMAL RESERVE provides life insurance guidance, not tax advice. Consult a qualified tax professional for advice about your individual situation.
Cash Value and Living Benefits.
These are two separate features of a permanent policy, and they are easy to blur together. They do different things.
Cash value
Value that can build inside the policy while it is in force. It is accessed through a loan or a withdrawal, and it is a matter of the policy’s accumulated value rather than a benefit triggered by an event.
Living benefits
Policy benefits that may allow an eligible policyholder to access a portion of the death benefit early when certain qualifying illnesses or injuries occur, subject to the policy contract.
For applicable policies offered through ABNORMAL RESERVE, living benefits are built into the coverage at no additional charge when available and when the client qualifies. They are not the same thing as cash value, and accessing one does not work the same way as accessing the other.
Living BenefitsYour Money Can Have More Than One Job.
When a permanent policy is properly designed and funded, cash value can become a source of capital that may be accessed later.
The idea is straightforward. The death benefit protects the people who depend on you, and it stays in place while the policy remains in force. Meanwhile, the value building inside the policy is available for the opportunities and needs that come up during your lifetime. One contract, doing more than one job.
That capital may potentially be used for things such as:
This is not a promise of returns, and it is not a claim that a policy outperforms any particular strategy. Policy loans carry interest. Accessing value has consequences, and those consequences are described in the contract.
What the concept offers is optionality: a place where value can accumulate while protection remains in force, available to be used when the right moment comes and left alone when it does not.
Build value inside the policy. Keep the protection in place. Access the value when appropriate.
Why People Choose It.
These are the reasons a permanent policy with cash value comes up in planning conversations. Which of them apply, and how much weight each one carries, is a question about the person rather than the product.
Permanent Protection
The policy can provide lifelong coverage when properly maintained.
Cash Value
Value can build inside the policy over time.
Access
That value may be accessible during life through loans or withdrawals, subject to the policy terms.
Living Benefits
Applicable policies can provide access to certain benefits during qualifying illnesses or injuries.
Tax Advantages
Life insurance can provide tax-deferred growth and potentially tax-advantaged access under applicable rules.
Financial Flexibility
Cash value can create another source of capital for future needs and opportunities.
Legacy
Permanent life insurance can provide a death benefit for beneficiaries while the policy may also provide benefits during the insured's lifetime.
What Determines How Much Cash Value You Build?
There is no single answer, and anyone who offers one without asking about the policy and the person is skipping the part that matters. Cash value depends on factors such as:
Cash value is not magic. The design of the policy matters.
Cash Value Is a Long-Term Feature.
Permanent life insurance is designed for long-term ownership.
Cash value typically becomes more meaningful as time passes, but the pace of growth depends on the specific policy. That is not a shortcoming to apologize for. It is the nature of a contract designed to last decades, and it is the reason the feature rewards a long view rather than a short one.
That is why a policy should be designed around a person’s long-term objectives rather than purchased simply because it has a cash value. The feature itself is not the point. Whether it is doing the job you need done is the point.
The goal is not to chase a number on an illustration.
The goal is to build a policy that continues to make sense as your life changes.
The Policy Design Matters.
Two permanent life insurance policies can have very different results.
The amount of coverage, the premium, the funding strategy, the policy type, riders, interest-crediting options, loans, withdrawals, and other contract features can all affect how the policy behaves. Change one of those and the policy you own is a different policy, even at the same premium.
This is why ABNORMAL RESERVE focuses on designing the policy around the person rather than starting with a product. The product is the last decision in the conversation, not the first. What someone is protecting, what they want the money to be able to do, and when they may need it all come before anyone discusses which contract to use.
The brand philosophy
The right policy follows the need.
Questions Worth Asking.
Before purchasing a cash value policy, make sure you understand the answers to these. Not because the answers are likely to be bad, but because a policy is a decades-long commitment and you should know how yours works.
Any agent worth working with will welcome these questions and answer them in plain language.
Cash Value Isn’t the Point.
What It Allows You to Do Is.
A properly designed permanent life insurance policy can provide more than a death benefit.
It can create protection for your family, living benefits when qualifying conditions occur, and a source of financial flexibility while you are alive. Those are three different jobs held in one contract, and the design is what determines how well each one is done.
The right policy follows the need.
Want to see how this could work for you?
General guides cover general situations. A conversation is where we look at your actual objectives and design around them. If permanent coverage with cash value is not the right answer for you, we will tell you that too.
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Disclosure
This page is educational and is not financial, tax, or legal advice. Cash value, crediting methods, guarantees, charges, and policy features vary by carrier, by state, and by contract. An illustration is not a guarantee of future results. Policy loans and withdrawals reduce the death benefit and cash value, may cause the policy to lapse, and can create taxable income if the policy lapses or is surrendered with an outstanding loan. The treatment of policy loans described here reflects current federal tax rules, which can change. Consult a qualified tax professional about your own situation. All guarantees are subject to the claims-paying ability of the issuing insurance company.