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BetterWealth
January 1, 2026
Life insurance can feel frustrating when it only seems useful after you’re gone. Many people want protection and a way to build accessible savings while they’re alive. That’s where a life insurance policy with cash value often enters the conversation.
At BetterWealth, we see this confusion all the time. People hear that cash value life insurance can build wealth, create flexibility, and offer tax advantages, but they’re unsure how it really works or whether the higher cost is worth it.
This guide breaks it down in plain English. You’ll learn how cash value grows, how you can use it, the pros and cons to watch for, and how to decide if a life insurance policy with cash value fits your long-term goals.
Cash value life insurance pairs a death benefit with a savings component that grows over time. This feature sets permanent policies apart from temporary coverage and opens up some unique financial opportunities during your lifetime.
Cash value acts like a savings account built right into certain permanent life insurance policies. When you pay your premiums, some of that money goes toward your death benefit, while another chunk accumulates in your cash value account.
Your cash value grows over time, and you don’t pay taxes on the growth until you withdraw the money. The growth rate depends on your specific policy.
You can actually use this money while you’re alive. Some folks take out loans, make withdrawals, or even surrender the policy for the cash.
But heads up: using your cash value can reduce your death benefit if you don’t repay what you borrow. The cash value doesn’t go to your beneficiaries; they get the death benefit, and the insurance company keeps the cash value.
Term life insurance covers you for a set period, usually 10, 20, or 30 years. It pays out only if you pass away during that time. There’s no savings component and no cash value.
Permanent life insurance with cash value lasts your entire life if you keep paying premiums. The premiums cost a lot more than term life because you’re paying for both the death benefit and the cash value feature.
Term life is great if you just need coverage for a certain time, like while raising kids or paying off a mortgage. Cash value policies are for people who want lifelong coverage plus a way to build savings. It really comes down to your budget and your long-term goals.
Several types of permanent life insurance offer cash value features:
When you pay your premium, part of it goes toward your death benefit, and another part builds up in a savings component. Growth can feel slow at first, but it picks up over time.
Your cash value starts off small and grows gradually with each premium payment. The insurance company splits your premium; one chunk covers the cost of your death benefit and fees, while the rest lands in your cash value account.
The growth is tax-deferred. That means you don’t pay taxes on the gains while the money stays in your policy, so your money can grow faster than it would in a regular taxable account.
Whole life insurance grows at a fixed rate set by the company. Universal life insurance offers flexible premiums and adjustable growth rates. Variable life insurance lets you invest your cash value in stocks and bonds.
In the early years, most of your premium covers insurance costs and fees, so cash value grows slowly. After about 10 to 15 years, the growth usually speeds up as less goes to fees and more builds your savings.
Your age matters a lot. Younger buyers pay lower premiums, so more of their money can go toward cash value instead of insurance costs.
The more you pay in premiums, the faster your cash value grows. Some policies even let you make extra payments just to boost your cash value.
Policy fees and charges also play a role. Every policy has administrative costs and mortality charges that eat into your premiums. Policies with lower fees leave more money for cash value growth.
If you take loans or withdrawals from your cash value, you shrink the balance that can keep growing. Outstanding loans rack up interest, which can chip away at your savings over time.
Whole life insurance earns a guaranteed minimum interest rate, spelled out in your policy contract. Some mutual insurance companies pay annual dividends based on their financial performance, but those aren’t guaranteed.
Universal life insurance credits interest based on rates set by the insurance company. These rates change from time to time and usually have a guaranteed minimum, so you’re not left totally at the mercy of the market.
Variable life insurance puts your cash value into investment subaccounts you choose. Your returns depend on how those investments perform. You could earn more than with other policy types, but you could also lose money if things go south.
Indexed universal life insurance ties your returns to a stock market index like the S&P 500. Your gains are capped at a certain rate, but you’re protected from losses with a guaranteed floor, usually 0% or higher.
You can tap into your policy’s cash value through withdrawals, loans, or by surrendering the policy. Each option has different tax implications and affects your death benefit in different ways.
When you withdraw money from your cash value, you’re taking out a portion for good. Withdrawals up to what you’ve paid in premiums are usually tax-free, since you already paid taxes on that money.
If you withdraw more than you’ve paid in, that extra bit may get taxed as income. Your death benefit drops by the amount you withdraw, and you can’t put that money back into the policy later. Some policies charge fees for withdrawals. Check your policy for any penalties or restrictions.
You can borrow money using your cash value as collateral. No credit check needed, and you don’t have to repay the loan, but interest will stack up if you don’t.
You can usually borrow up to 90% of your cash value, depending on your insurer’s rules. If you die before repaying the loan, the insurance company subtracts the balance plus interest from your death benefit.
Interest rates on policy loans are typically lower than credit cards but higher than home equity loans. You get to decide when and how much to pay back, or you can just let the interest compound.
Surrendering your policy means you cancel it and walk away with the cash value. You’ll get the accumulated cash value minus any surrender charges.
Surrender charges usually decrease over time and may disappear after 10 to 15 years. Anything you get above what you paid in premiums could be taxed as income. Once you surrender the policy, your coverage ends. Your beneficiaries won’t get a death benefit, and you can’t restart the same policy later.
Cash value life insurance gives you lifelong protection and a stash of funds you can use before you die. You get a death benefit for your loved ones and a savings component that grows over time.
Your coverage stays in place as long as you keep paying premiums, no matter how old you get. Unlike term life insurance, which eventually expires, permanent policies with cash value don’t leave you hanging in your later years.
You can borrow against your cash value when you need money for emergencies or big purchases. You can also withdraw funds directly, though this reduces your death benefit.
Some policies let you use your cash value to pay premiums if you hit a rough patch financially. That keeps your coverage active without out-of-pocket payments.
Your cash value grows without being taxed every year. That means you don’t pay taxes on the growth as long as the money stays in the policy.
Loans against your cash value usually aren’t taxed, since the IRS treats loans as borrowed funds, not income. You only face possible taxes if your policy lapses with an outstanding loan.
Withdrawals up to the amount you’ve paid in premiums are typically tax-free. Your beneficiaries also get the death benefit without paying federal income tax.
You can tap into your cash value during retirement to cover living expenses. It’s another source of cash, beyond Social Security or retirement accounts.
Taking policy loans gives you cash flow without the required minimum distributions that come with traditional IRAs and 401(k)s. You choose when and how much to access.
Your cash value can help bridge income gaps before you claim Social Security or start tapping retirement accounts. That flexibility lets you manage your tax situation in retirement.
Cash value life insurance policies cost more and come with complex features that can affect your financial plans. If you access your cash value, your death benefit may shrink, and missing premium payments can put your entire policy at risk.
Cash value policies cost way more than term life insurance. You’ll often pay 5 to 15 times higher premiums for the same death benefit.
These policies come with several fees that chip away at your returns. Administrative fees cover the insurer’s operating costs. Mortality charges pay for the death benefit protection. Investment management fees apply if your policy includes mutual funds or other investments.
Surrender charges can be a big hit if you cancel your policy in the first 10 to 20 years. They start high and gradually decrease over time.
The high costs mean it takes years, sometimes a decade or more, before your cash value really starts to add up.
When you withdraw money or take a loan from your cash value, your death benefit drops. A $500,000 policy with a $50,000 loan outstanding will only pay $450,000 to your beneficiaries.
Unpaid loan interest compounds over time. If you borrow $30,000 and never repay it, the loan balance can balloon to $60,000 or more after several years. That gets subtracted from your death benefit.
Some policies let you maintain your full death benefit even when you access cash value, but you’ll pay higher premiums from the start. Is the extra cost worth it for you? That’s something to weigh carefully.
If you skip premium payments, your policy can lapse. When that happens, you lose both your death benefit and the cash value you've built up.
Outstanding loans make things even riskier. If you have a loan out, the insurance company will use your cash value to pay missed premiums. But if your loan balance creeps too high, there might not be enough left to keep the policy alive.
If your policy lapses while you still owe on a loan, the IRS treats the loan amount as taxable income. That can mean a surprise tax bill, sometimes a big one. It's even worse if you've already spent the cash and don't have money set aside for taxes.
Making A Confident Decision About Cash Value Life Insurance
A life insurance policy with cash value can solve two problems at once: protecting your family and building money you can access while you’re alive. But higher costs, policy fees, and misuse of loans can turn a good idea into a costly mistake if you don’t understand how it works.
At BetterWealth, the goal is clarity before commitment. Understanding the trade-offs, timelines, and long-term impact helps you decide whether cash value life insurance supports your broader financial plan instead of complicating it.
If you want help thinking through your options, schedule a free Clarity Call. It’s a simple conversation to help you decide whether a life insurance policy with cash value actually fits your goals and your budget.
A life insurance policy with cash value is a type of permanent life insurance that includes both a death benefit and a built-in savings component. Part of your premium goes toward insurance costs, while the rest builds cash value over time. That cash value can be accessed while you’re alive.
Cash value grows tax-deferred inside the policy, unlike a regular savings account where interest may be taxed each year. The money is also tied to the life insurance contract, which means access rules, fees, and impacts on the death benefit apply. It’s more structured, but it comes with unique tax and planning features.
Yes. You can access cash value through policy loans, withdrawals, or by surrendering the policy. Each option affects your cash value and death benefit differently, so it’s important to understand the trade-offs before using the money.
Policy loans are generally not taxable because they are treated as borrowed money, not income. However, if the policy lapses or is surrendered with an outstanding loan, taxes may apply. Managing loans carefully is critical.
In most cases, yes. Withdrawals permanently reduce the death benefit, and unpaid policy loans plus interest are deducted from the payout to beneficiaries. Some policies are structured to preserve the full death benefit, but they usually cost more.
Cash value growth is slow in the early years due to insurance costs and fees. Many policies begin to show meaningful growth after 10 to 15 years. A life insurance policy with cash value is typically a long-term strategy, not a short-term savings tool.
It depends on your goal. Term life is usually better for low-cost, temporary coverage. Cash value life insurance may make sense if you want lifelong protection and are comfortable paying higher premiums for added flexibility and long-term benefits.
This type of policy is often a better fit for people with stable income, long-term planning horizons, and a desire for tax-advantaged growth and flexibility. If budget is tight or coverage is only needed temporarily, other options may be more practical.
If you surrender the policy, you receive the cash surrender value, which is your cash value minus any surrender charges and outstanding loans. Amounts above what you paid in premiums may be taxable, and coverage ends permanently.
Look closely at premium commitments, fees, surrender charges, growth assumptions, and loan rules. Understanding these details upfront helps avoid surprises and ensures the policy aligns with your long-term financial goals.
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