What Is the Cash Value of a Life Insurance Policy?

A permanent life insurance policy's cash value is an asset that can accumulate. As you pay premiums, that money builds and may eventually be available for withdrawal. Learn about cash value, its purpose, and the fundamentals of how it works.

What Is the Cash Value of a Life Insurance Policy?

The cash value of a permanent life insurance policy is the amount of money contained within it. It is the amount of money left over after your premiums cover policy fees and expenses, including the cost of insurance. Cash value increases over time can help offset rising insurance costs as the insured person ages.

How Cash Value for Life Insurance Works

When you pay premiums on a permanent insurance policy, a portion of the money goes into what is known as the policy's cash value. If all goes well, your monetary value will increase over time. The pace of growth (or loss) is determined by the type of policy and the manner in which the cash value is invested. 

Permanent Policies

Only permanent life insurance policies have cash value, not term insurance policies. For example, cash value can be found in the following types of life insurance policies, each of which invests the cash-value component differently:

• Whole life
• Universal life
• Variable life
• Indexed life

You can also access the cash value through direct withdrawals from the policy's cash value or through policy loans against the cash value. 

How It Works

A permanent life insurance policy frequently begins with a premium that is greater than the amount required to provide pure life insurance protection. For example, full life insurance (a sort of perpetual insurance) may have a level premium that remains constant year after year. Any excess money from your premiums goes towards your cash value in the early years, where it can be invested. Your cash worth and any earnings help pay for the policy as you age and the cost of insurance rises.

Earnings and Losses

Your cash value may increase or decrease depending on the type of insurance you have. Some policies offer a fixed interest rate, whilst others, such as variable life insurance, allow you to invest your cash value in financial instruments such as stocks and bonds.

Cash Value vs. Face Value

Cash Value

A life insurance policy's cash value is the cumulative sum inside the policy. This balance is created when premium payments exceed the cost of insurance, and it can increase or shrink depending on how the policy performs.

The insurance owner has access to the cash value and can choose to surrender the policy, take withdrawals, or borrow against it. These acts, however, may result in the loss (or reduction) of coverage, as well as possible tax ramifications.

Face Value

The death benefit, or the amount beneficiaries receive if the insured individual dies while the policy is in place, is the face value. This is frequently the amount you select when applying for and purchasing life insurance coverage.

Cash Surrender Value

You may believe that if you have cash value in a life insurance policy, you can cash it out and collect 100% of the balance. However, your insurer may levy surrender charges, which diminish the amount you receive. Ask the insurer for the cash surrender value, which is the amount you'll receive after the insurer deduct surrender charges, to obtain an accurate understanding of how much is available.

Taking advantage of the cash surrender value effectively cancels the policy. You can keep the policy in force and the death benefit for your beneficiaries if you opt to access the cash value instead through a borrowing against the insurance or a straight withdrawal. (However, in some cases, the death benefit may be lowered.)

Does Term Life Insurance Have Cash Value?

Term life insurance does not often include a cash value; it is a "pure" form of life insurance that provides a death benefit with no investment component. If your primary purpose is to protect loved ones against the untimely death of a family member, a policy with monetary value may not be necessary.