The types of life insurance that build cash value

There are two main forms of life insurance: term life and permanent life. Only permanent policies can build cash value. Term life insurance is typically less expensive, but it does not build cash.

Permanent life insurance policies are typically more expensive than term life insurance policies for several reasons. First, permanent policies provide coverage for your entire life, not just a pre-determined amount of time, or "term."3 Secondly, permanent insurance policies can build cash value which can be used for future expenses, like supplementing retirement income. Term life insurance, on the other hand, is what may be referred to as "pure insurance," meaning there's an insurance payout for your beneficiaries if you pass away (the "death benefit") but nothing else.

Permanent life insurance is available in two primary types: whole life and universal life. While both are permanent, provide a designated death benefit, and can build cash value, the big difference between them has to do with guarantees and flexibility.4 Whole life insurance offers guaranteed level premiums and a death benefit that stays the same for the length of the policy. It also has a guaranteed rate of cash value growth, meaning you can predict the minimum cash value your policy will have over time. If purchased from a mutual life insurance company, like Guardian, these policies can also earn additional dividends.5 By contrast, universal life insurance offers more flexibility with fewer guarantees. It gives you the freedom to adjust your premiums up or down within a certain range, which can be helpful for people with variable incomes. However, this can affect the rate of cash value growth and even the death benefit amount if minimal premium payments are made for too long.6 With both whole life and universal life, the actual amount of cash value you build will vary based on the specific terms of your policy. 

How to access your cash from a life insurance policy: Four ways

It usually takes a few years until the cash value in a policy grows to a usable sum, but once that happens, you’ll have a financial asset that provides many advantages you can use while you’re still alive. Unfortunately, many people never maximize their cash value benefit because they don’t know how. There are four methods for accessing the cash value in a universal or whole life policy:

  1. Surrender: One option is to cancel the policy entirely and take the surrender value cash payment. However, with this option, you will no longer have life insurance coverage, and the cash you receive will be lowered by any fees taken out. Surrender fees can be significant, especially with a newer policy. Surrendering a policy before retirement age should be considered a last resort, especially if you don’t have other life insurance in place (in that case, think about getting a term life insurance quote before signing the paperwork). If you want to surrender your permanent life policy because of the premium cost, consider using the cash value to cover your premium payments (#4, below).
  2. Withdrawal: In many situations, you can take a cash withdrawal from your permanent life policy, and that money is often not subject to income taxes as long as it’s not more than the amount you’ve paid into the policy. However, there are potential disadvantages: your death benefit will likely be reduced, depending on the value of your cash account, and that reduction may be greater than the amount withdrawn, depending on the specific terms of your policy. Talk to your agent or life insurance company to find out how withdrawing money from your specific policy works. 
  3. Loans: You can typically borrow money through your policy, although the amount varies. The money does not actually come from your policy but rather from the insurer who then uses your policy as collateral. Life insurance loans include interest payments, but it’s typically a lower rate than you’d get with personal loans or even a home equity loan. There’s no loan application or credit check, and credit rating does not impact your interest rate. You can choose not to repay, but the outstanding loan balance will typically be deducted from your death benefit. A policy loan can be a helpful option if you momentarily need cash but want to keep the full death benefit in force by repaying the loan amount.
  4. Use cash value to pay your life insurance premium. You can typically use the money in your cash value to pay part or all of your policy premiums, making it easier to keep your coverage in place. This is a popular option for older policyholders who want to use retirement income for living expenses but still want to keep life insurance coverage in place. 

What if I don’t use my cash value?

After a time, the cash accumulations in a policy can grow larger than the "face value" or death benefit. If you've accumulated cash value that you do not intend to use in other ways, the cash value can increase the amount of death benefit to your beneficiaries instead.

Thinking about getting a universal life or whole life insurance policy to protect your family and help build your financial future? You should talk things over with someone who can help you decide exactly which type of policy is right for you. A lot will depend on your age, financial situation, family status, and other factors. If you don’t have a financial professional to discuss insurance with, Guardian can help you learn more about buying life insurance or even find a nearby financial professional who will listen to your needs and help guide you to a solution.

Frequently asked questions about accessing life insurance cash value

Can you cash out a life insurance policy before death?

If you have a permanent life insurance policy, then yes, you can take cash out before your death. There are three main ways to do this. First, you can take out a loan against your policy (repaying it is optional). Loans are generally provided at lower interest rates than a bank loan, do not require credit checks, and do not affect your credit rating. Second, you can withdraw some of the funds from your cash value, either in a lump sum or in payments. For both of these options, your death benefit will generally be reduced. The last option is to surrender the policy altogether. This should typically be considered as a final resort, as this cancels the policy and the life insurance coverage that comes with it. With surrender, you may also pay taxes and fees, which can significantly reduce your cash value. If premium payments are an issue, you may also be able to use your cash value to cover that cost. 

How much can I withdraw from my life insurance?

This will vary on how much cash value you have, based on the type of policy you own (e.g., whole life or universal life), the amount of insurance you have, and how long you have had the policy. Your cash value grows tax-deferred, and the longer the policy has been in place, the greater the sum in your policy – provided you haven’t taken a withdrawal. 

Note that there is a difference between the amount of your death benefit – or “face value” – and the amount of your cash value.

 How do you cash out a life insurance policy?

There are three main ways to get cash out of your policy. You can borrow against your cash account typically with a low-interest life insurance loan, withdraw the cash (either as a lump sum or in regular payments), or you can surrender your policy. 

Get an instant Term Life quote
Go Now


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 a dividend until the policy’s third year. Talk to your financial professional 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 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

4 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

5 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

6 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

2021-124333  20230930