Introduction
Cash value is one of the most misunderstood features of permanent life insurance. While not every policy includes cash value, for those that do, it can serve as a long-term planning tool for protection, liquidity, and flexibility.
This blog explains how cash value works, its benefits, and what families should know before using it.
What Is Cash Value?
Cash value is the accumulation component inside certain permanent life insurance policies. Depending on the policy type, cash value may grow:
- At a fixed rate (Whole Life)
- Based on index crediting (IUL)
- Based on carrier investment performance (Variable UL — not covered here)
Cash value is different from the death benefit.
How Cash Value Grows
1. Premium Payments
A portion of each premium goes toward cash value (varies by policy).
2. Interest Crediting
Cash value may grow based on:
- Fixed interest rates
- Index crediting
- Carrier-declared rates
3. Tax-Deferred Growth
Cash value grows tax-deferred under current tax law.
How Cash Value Can Be Used
1. Policy Loans
You may borrow against your cash value.
Loans reduce cash value and death benefit unless repaid.
Loans accrue interest.
2. Withdrawals
You can withdraw up to your basis (amount paid in premiums) tax-free.
Withdrawals reduce cash value and death benefit.
3. Supplemental Income (When Suitable)
Some people use cash value to supplement retirement income.
Outcomes depend on funding, design, and product rules.
Benefits of Cash Value
- Liquidity
- Flexibility
- Long-term planning potential
- Tax advantages
- Lifetime protection (if maintained)
Risks & Considerations
- Underfunding may cause lapse
- Loans accrue interest
- Poor performance may require higher premiums
- Ending a policy may trigger taxes
- Caps and participation rates apply to IUL crediting
- Suitability depends on long-term commitment
Conclusion
Cash value can be a valuable planning tool when understood and managed correctly. It provides flexibility and stability — but requires responsible management.
