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Cash value life insurance explained

How it works, pros and cons, and deciding if it's right for you.
Guardian Life Insurance of America
Written by

Reviewed by

cash value life insurance

All life insurance has the same primary purpose: to provide a death benefit to your beneficiaries if you pass away. It's paid free of income tax and can be a significant source of financial protection for your family.

Some policies also have a cash value component1: A portion of your premium goes towards the death benefit, and another part goes to a cash account, where it grows tax-deferred over time. This cash value can become a significant financial asset that can be accessed throughout your life.2 Here you'll learn about:

  • How cash value life insurance works

  • What types of life insurance have cash value components

  • The benefits and potential disadvantages of cash value policies

What is cash value life insurance?

Some permanent life insurance policies — whole and universal3 — have a cash value component that accumulates over time as you continue to pay your premiums.

A cash value life insurance policy has two key components

The death benefit

Cash value

The funds your beneficiaries will receive upon your death, paid out income tax-free.

Funds that grow over time and are available for you to use in different ways – for example, borrowed against, withdrawn, or used to pay premiums.

The death benefit is payable in full from the first day the policy takes effect, and is guaranteed to be paid to beneficiaries — no matter what age the insured dies — as long as the policy remains in force. And with each premium payment, the cash value grows steadily over the years. So a cash value life insurance policy can help protect and build wealth at the same time: the death benefit protects family finances in the case of early death, while cash value builds family wealth, providing access to funds with tax benefits.4

How does cash value life insurance work?

When you pay life insurance premiums, a portion of your payment goes toward covering the cost of insurance (i.e., the death benefit) plus any administrative fees and other policy expenses.

Cash value growth

The remaining portion of the premium can help grow your cash value. These funds increase over time, based on how much you pay in, and how funds in the cash grow. Whole and universal life policies typically grow at a fixed interest rate, which may adjust periodically. Variable and indexed policies also allow you to assign some of your cash value to investments like equities (stocks) or index funds, which could potentially increase value growth if you are willing to accept a level of downside risk.

Guardian permanent and whole life insurance policies offer a variety of cash value growth options. You can, for example, assign some of your cash value to a fixed-rate interest account and put the rest in a market-indexed option with the potential to build cash value more quickly. Whichever method or methods you use, the cash value can be used to pay premiums, be borrowed against, or be surrendered for cash to help fund your retirement.

Accessing cash value

Once the cash account has accumulated enough funds, you can use it in a variety of ways. You can borrow against it by using funds in your cash account as collateral for a loan with favorable interest and repayment terms.5 You can typically use cash value to pay your premiums, helping to keep the policy in force after you stop working. Or you can make a policy withdrawal if needed.

Tax advantages

Cash value life insurance is tax-efficient, which means it helps your money grow faster because interest and investment earnings on the cash value aren't taxed. You can also borrow against the cash value tax-free as long as you aren't surrendering or canceling the policy.6

Estate planning

Some policyholders use life insurance with cash value components to transfer generational wealth, making it a useful estate planning tool. Tax-deferred growth can help you build cash value, and death benefits aren't subject to income tax. However, interest that your beneficiaries receive from the cash value can be taxed.7

Using cash value can affect your coverage

There are implications to using your cash value, which can affect the death benefit. If you withdraw from or borrow against your cash value, for example, the policy's death benefit will likely be reduced. Depending on the value of your cash account and your policy's terms, the impact on the death benefit could be greater than the amount you withdrew.8

it's also important to understand how your cash value is impacted if you surrender the policy. In some situations, you could owe taxes if you receive more in cash surrender value than the sum of premiums you've paid.9

Here's an example: Let's look at a policy with a $50,000 death benefit, no outstanding withdrawals or loans, and the policyholder has accumulated cash value of around $10,000.

If the policyholder passes away, the company pays the full death benefit of $50,000 to the beneficiaries named on the policy. The cash value does not get paid to the beneficiary and becomes the property of the insurer.

On the other hand, what if the policyholder had borrowed $10,000 against their accumulated cash value, without paying it back before they died? In that case, the outstanding loan amount and any associated fees and interest would be subtracted from the death benefit. So, their beneficiaries might only receive around $38,000 of the original $50,000 death benefit.

What kind of life insurance is right for you?

What types of life insurance have cash value?

Whole Life
Insurance

Universal Life
Insurance

Indexed Universal
Life Insurance

Variable Life
Insurance
10

Premiums

Fixed

Flexible

Flexible

Either

How Cash Value Builds

Predictable interest

Potential dividends
(from mutual
insurers)

Interest, which may adjust to reflect current rates

Tied to index funds,
with a cap

Minimum
guaranteed interest
rate

Market investment
options, which
lose value

Market Growth
Potential

No

No

Some market upside

Yes

Investment Risk

Lowest

Low

Some risk

Highest

Whole life insurance

This is the most common type of cash value policy and offers the most guarantees: a guaranteed death benefit, fixed premium payments that are guaranteed to never go up, and cash value that grows tax-deferred at a predictable interest rate.11

If you get a whole life insurance policy from a mutual insurer, like Guardian, it may also earn dividends based on company performance because these insurance companies are actually owned by their policyholders. Whole life insurance with cash value can be the cornerstone of a reliable wealth-building strategy, especially if you've already leveraged other retirement or investment options that offer tax benefits.

Universal life insurance

This type of permanent life insurance policy offers greater flexibility, with premium payments that can adjust up or down within a certain range, along with the death benefit amount.

This can let you adjust your life insurance coverage and costs as your needs and income change. The cash value portion grows tax-deferred based on interest rates declared by the life insurance company.12

Indexed universal life insurance

This allows policyholders to build cash value based on the performance of an underlying index, such as the S&P 500.13 Policyholders are protected against market downturns with a minimum guaranteed interest rate. Still, annual gains are also capped, so this type of policy offers less risk and growth potential compared to a variable policy.14

Variable life insurance

This lets policyholders invest the cash value portion in a variety of market investment options. Cash value growth depends on the performance of those investments, offering more risk — and potential reward — compared to other types of cash value life insurance.15 A variable universal life insurance policy also offers flexible premiums that can be adjusted within a certain range, but care must be taken to ensure that the cash account doesn't fall below certain minimums, or the policy could lapse.

Note: Term life insurance — which lasts for a limited period of time (typically from 10-30years) — offers a death benefit but does not build any cash value.

Four ways to access cash value

A cash value life insurance policy gives you several ways to access your accumulated cash value. Before doing so, you should talk to your financial professional and a tax to determine the best choice for you. Policies terms vary somewhat, but options typically include:

  1. Withdrawals: Policyholders can make partial withdrawals from the cash value, which are generally income tax-free up to the amount of the premiums paid. Any additional withdrawals may be subject to taxes or penalties, depending on the policy and the amount withdrawn.16 Any cash value withdrawn that exceeds the sum of paid premiums will be considered taxable income.

  2. Loans: Policyholders can take out a loan against the cash value, using the policy as collateral. Loans can provide access to funds without triggering immediate taxes or surrender charges. However, outstanding loan balances will typically reduce your death benefit if not repaid.17 However, this is not considered taxable income.18

  3. Surrender: Surrendering the policy involves canceling the coverage and receiving the cash value accumulated in the policy. This option may trigger surrender charges by the insurance company, particularly if you cancel in the early years of the policy.19 Also, note that any amount that exceeds your paid premiums may be considered taxable income.

  4. Paying Premiums: You may be able to use cash value to pay premiums. This can be useful if you want to reduce regular expenses but still wish to maintain full coverage. This use isn't considered taxable income.

What are some of the pros and cons of cash value life
insurance?

If you're trying to decide if it's a good fit for you, here are some things to consider:

Advantages

  • Gain lifelong coverage: Cash value components are only available with universal or whole life insurance, which provides lifelong coverage with a guaranteed death benefit.

  • Build savings: Many policyholders use cash life insurance as a wealth building tool since they can borrow against or withdraw cash value as it accumulates.

  • Get tax benefits: Cash value grows tax-deferred, and loans borrowed against the cash value are income tax-free unless you cancel or surrender the policy.20

  • Supplement retirement income: These policies can help supplement retirement income, especially if you have maxed out other tax-advantaged retirement accounts such as IRAs.

  • Flexible access to funds: Unlike less liquid forms of savings, you can access cash value as soon as it’s accumulated. This can provide quick access to money without significant tax implications, and can be particularly help before you’re ready to withdraw from conventional retirement accounts.

  • Simplify wealth transfer: Cash value policies provide lifelong protection which can also be help with estate planning, because death benefit payouts bypass the probate process.

Drawbacks

  • Cost: Cash value policies usually have higher premiums than term life insurance policies with comparable death benefits.

  • Complexity: Cash value policies are usually more complicated than term life insurance policies, so you'll probably need to spend more time understanding and managing your coverage.

  • Potential for reduced death benefit: Withdrawals and loans from your cash value account can change your policy’s death benefit. This may happen if you take out a policy loan that isn’t repaid before death, or if you withdraw funds from your cash value account.21

Why so many people choose Guardian cash value life insurance

When you're looking for a permanent cash value life insurance policy, history matters. Guardian has been insuring families and individuals for over 160 years, so our policyholders can trust we'll be there when it matters. In fact, as a mutual insurance company, we're actually owned by our policyholders, so we don't have to answer to outside shareholders like some other companies.22 And financial professionals know that with some of the highest financial ratings in the industry, they can confidently recommend Guardian life insurance to their clients.

Is cash value life insurance right for you? Talk to a professional.

Permanent life insurance that builds cash value can be a powerful financial tool to help protect your family and lifestyle. Generally, it can be a good fit for those who would like a tax-efficient growth vehicle in addition to the lasting financial protection of a permanent death benefit.

That said, every individual's situation is unique. So it's a good idea to consult with a financial professional who can help you decide what's best for you. If you don't know such a person, ask friends or colleagues for a recommendation. Or, Guardian can connect you to a Financial Professional who can help.

Need some help?

Find a financial professional near you who can help

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1. Some whole life polices do not have cash values in the first two years of the policy and don’t pay dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

2. Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

3. A Universal Life Insurance (UL) policy provides a flexible premium, choice of death benefit options, and a guaranteed crediting rate e.g. 2%). Policy growth is based on adequate funding, increasing crediting rates, and if costs of insurance is lower than expected. If any of the three factors just mentioned are lower than expected (policy funding and crediting rates), and/or higher than expected (cost of insurance), the policy may lapse.

4. https://www.guardianlife.com/life-insurance/tax-benefits

5. https://www.investopedia.com/ask/answers/111714/what-collateral-assignment-lifeinsurance.asp

6. https://www.investopedia.com/ask/answers/111714/what-are-tax-implications-lifeinsurance-policy-loan.asp

7. https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurancedisability-insuranceproceeds#:~:text=Generally%2C%20life%20insurance%20proceeds%20you,for%20more%20inf

8. https://www.guardianlife.com/life-insurance/withdraw

9. https://www.guardianlife.com/life-insurance/surrender

10. A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. Its crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

11. https://www.investopedia.com/articles/pf/07/whole_universal.asp

12. https://www.investopedia.com/articles/pf/07/whole_universal.asp

13. The S&P 500 price return index is a product of S&P Dow Jones Indices LLC (“SPDJI”) and has been licensed for use by The Guardian Life Insurance Company of America (Guardian). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Guardian. The Index Participation Feature (“Product”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such Product nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 price return index.

14. https://www.investopedia.com/articles/insurance/09/indexed-universal-life-insurance.asp

15. https://www.investor.gov/introduction-investing/investing-basics/investmentproducts/insurance-products/variable-life

16. https://www.investopedia.com/ask/answers/111314/how-can-i-borrow-money-my-lifeinsurance-policy.asp

17. https://www.investopedia.com/ask/answers/111314/how-can-i-borrow-money-my-lifeinsurance-policy.asp

18. https://www.investopedia.com/articles/pf/08/life-insurance-cash-in.asp

19. https://www.guardianlife.com/life-insurance/surrender

20. https://fidelitylife.com/life-insurance-basics/whole-life-insurance-101/the-tax-benefits-of-cash-value-lifeinsurance/

21. https://doi.sc.gov/FAQ.aspx?QID=350

22. The ratings of The Guardian Life Insurance Company of America® (Guardian) quoted in this report are as of December 31, 2024 and are subject to change. The ratings earned by Guardian do not apply to the investments issued by The Guardian Insurance & Annuity Company, Inc. (GIAC) or offered through Park Avenue Securities LLC (PAS). Rankings refer to Guardian’s standing within the range of possible ratings offered by each agency. 2 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors .The total dividend calculation includes mortality experience and expense management as well as investment results.

Other legal information: Financial information concerning Guardian as of December 31, 2024, on a statutory basis: Admitted Assets= $86.8 Billion; Liabilities = $77.5 Billion (including $60.7 Billion of Reserves); and Surplus = $9.3 Billion.

Financial information concerning GIAC as of December 31, 2024, on a statutory basis: Admitted Assets = $10.6 Billion; Liabilities = $10.0 Billion (including $3.5 Billion of Reserves); and Capital and Surplus = $0.6 Billion. Financial information for Berkshire Life Insurance Company of America as of December 31, 2024, on a statutory basis: Admitted Assets = $5.5 Billion; Liabilities $5.3 Billion (including $1.1 Billion in Reserves); and Capital and Surplus = $0.2 Billion.

23. https://www.annuity.org/selling-payments/life-insurance-settlements/cash-value/

24. https://doi.sc.gov/FAQ.aspx?QID=350

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Frequently asked questions about cash value life insurance

As with other financial products, that depends on a person's life situation and goals. Is it a good option for you? There are different kinds of cash value and permanent life insurance policies to consider. For example, a whole life insurance policy can provide financial confidence that other products may not, with protection that lasts your entire life at guaranteed level rates. And whole life insurance cash value grows at a guaranteed rate unaffected by financial markets. On the other hand, universal life policies can be less expensive while giving you the flexibility to adjust premiums within a certain range, but in certain circumstances, you may have to pay higher premiums to maintain coverage.

Yes, you can generally withdraw the available cash value from a permanent life insurance policy. There are several ways to do this: You can simply withdraw funds; you can borrow against the cash value, using your policy as collateral; you can cancel the policy entirely and receive the full cash surrender value; or you can use the cash value to pay your premiums. Whether or not a specific policy allows all these methods depends on the policy terms and conditions.

Cash value takes time to grow, and there is no one "correct" answer because the total cash value at any point depends on several factors, including the monthly premium, how long the policy has been in force, and the specific terms of the policy. That said, here is an example: A 50-year-old male paying approximately $30 monthly for a $10,000 whole life plan might have an estimated cash value of $1,500-$2,000 after ten years.

The cash value of your life insurance policies will accumulate over time — there's no set cash value you can access as soon as the policy begins. Your insurance company should be able to tell you the cash value of your policy, or you can estimate the cash value by calculating the total sum of your payments and subtracting your policy's surrender fees.23

The downsides of cash value life insurance may include:

  • Higher cost premiums than term life insurance policies.

  • Potentially more complex than other life insurance policies.

  • May result in a reduced death benefit if cash value is accessed.24