Cash Value Life Insurance Explained | Benefits & Setbacks

Cash Value Life Insurance is one of the types of Life Insurance. This a feature that’s essentially offered within a permanent life insurance policy, such as whole life insurance and universal life insurance.

People use this type of life insurance as an investment-like savings account and take money from it from time to time. While purchasing cash-value life insurance might seem to be a smart choice, sometimes you won’t get the right one.

Therefore, understanding what cash value is, and how it works will help you know if it’s the best fit for you and your financial stats.

What is Cash Value Insurance?

This type of life insurance comprises multiple types of life insurance that have a cash value account within.

The cash value component earns interest or other investment gains and grows tax-deferred. Also, term life insurance has no cash value.

There are lots of options for you if you have this type of life insurance policy. Each policy type accrues cash value differently, but in all cases, you’ll get your cash value through a policy loan, withdrawal, or surrender of the policy.

Once you make a premium payment for this type of life insurance, it goes to three places:

  • Into the policy’s cash value.
  • To the insurer’s cost providing the death benefit.
  • Toward life insurance company fees and charges.

Only a small portion of what you pay winds up in cash value. The part that goes into the cash value account grows according to a fixed amount and on investment gains.

One vital aspect of this kind of life insurance is tax code 7702.

This tax code sets the guidelines for how much money can be paid into this type of life insurance component of the policy without losing its tax-deferred stats. If the amount of money put toward cash value exceeds these limits, you may need to pay taxes.


In the aspect of this type of life insurance, there are several different types of policies to choose from. It’s good to know the difference between them if you’re considering buying cash-value life insurance.

  • Whole Life Insurance
  • Guaranteed issue Life Insurance
  • Indexed Universal Life Insurance 
  • Variable Universal Life Insurance 

These are the main types, to find out more about them, click here.

Benefits of Cash Value Life Insurance

If this life insurance is right for you, it depends on why you want a policy, and the kind of policy you want.

  • Your Beneficiaries receive a death benefit
  • Participating life insurance policies have dividends
  • You can add riders for extra coverage
  • Cash value life insurance offers tax advantages


Every life insurance has advantages and disadvantages, and not all life insurance will look as perfect as they seem to be, here are the setbacks you get from Cash Value life insurance:

  • This type of life insurance costs more than term life insurance
  • Cash value takes time to build
  • It is not paid to beneficiaries in most cases
  • Your policy could lapse if you borrow too much
  • Application of taxes when necessary.

Most people don’t know how to utilize this type of life insurance policy, however, see the following section, and find ways to utilize cash value insurance policy.

Ways to Utilize a Cash Value Life Insurance Policy

There are many different ways to use the cash value component of your life insurance policy while you’re alive. Here are ways to do so:

  • Take Out a Loan: You can borrow against this type of permanent life insurance policy and use the money to do what you want in an emergency, supplement retirement income, or other things.
  • Withdraw Money From Cash Value: If the amount you withdraw includes investment gains, often referred to as the part “above basis”, such potion is taxable as income. Make a withdrawal to reduce your beneficiaries’ future life insurance payout.
  • Surrender the Policy for Cash: Once you cancel the life insurance, it’s known as surrendering your policy. If you do this, you’ll get back the cash value excluding any surrender charge. The insurance company will also subtract any unpaid premiums or large loan balances.

Cash Value Life Insurance FAQs

Does every life insurance policy have Cash Value on Life insurance? 

Not all type of life insurance has a cash value component. Like term life insurance, it does not have a cash value component.

How long does it take to build cash value on life insurance?

It can take about decades to build a substantial cash value, however, some policies are designed to gather cash value quickly in the early years of the policy.

Can I take the cash value of my life insurance?

You can withdraw more or take the loan against your cash value, and use the money for anything you like. Once you decide to terminate your policy, you can take this type of life insurance, excluding any surrender charges.

Is life insurance with Cash Vale worth it?

A life insurance policy with cash value could be worthwhile if you want to tap into money while you’re still alive.

Tokwiki assists you in making smart insurance decisions, so feel free to visit our official page for more life insurance tips. And if any question arises, visit our comment section below.

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