Cash value

Cash value is the portion of a permanent life insurance policy that accumulates over time and belongs to the policy owner while the policy is in force. Term life has none. In whole life, cash value grows on a guaranteed schedule plus any dividends; in universal life it grows by a credited interest rate or an index-linked formula; in variable life it rises and falls with the subaccounts.

Early premiums pay for the cost of insurance, commissions and expenses, so cash value builds slowly at first. Hypothetical example: a 35-year-old paying $5,000 a year into whole life might have little or no cash value after the first year and around $35,000 after 10 years, depending on the policy's design and dividends. As cash value grows, the insurer's net amount at risk shrinks, because part of the death benefit is effectively the owner's own money.

Owners can tap cash value through a policy loan, a withdrawal or a full surrender. Growth is tax-deferred, and loans generally are not taxed while the policy stays in force, but unpaid loans reduce the death benefit and can cause a lapse with a tax bill. On most policies, the beneficiary receives the death benefit, not the death benefit plus the cash value. See whole life cash value: how it grows and how to use it and how cash value is taxed: withdrawals, loans and surrenders.