Cash value is a unique feature to permanent life insurance policies.
Although the term “whole life insurance” is often used synonymously with permanent life insurance, whole life, universal life, and variable life are actually types of permanent life insurance. Other permanent life insurance policies are a variation of these three products.
All permanent life insurance policies have a cash value that grows on a tax-deferred basis. You can take a loan on the cash value or use it as collateral during your lifetime, tax deferred. This is why permanent life insurance is considerably more expensive than term life insurance. The exact cost will vary based on the type of permanent life insurance policy you choose: whole, universal, variable, guaranteed universal, indexed universal, and variable universal.
Quick tip: Talk with an insurance specialist who understands permanent life insurance to choose the policy that works best for your financial situation and risk tolerance.
The initial years of a permanent life insurance policy are expensive compared to what you’ll pay in the future. “In the early years of overpayment, the cash value put inside the policy earns interest and you use that bucket of money to offset the cost of insurance when you’re older,” said Mark Williams, CEO of Brokers International.
The big difference between the types of permanent life insurance policies is how they manage the cash value — in the insurance company’s portfolio, stock market, or annuities.
| Types of permanent life insurance | Best for | Where is the cash value invested |
| Whole Life | Guaranteeing exact same premium for the life of the policy | In your insurance company’s portfolio |
| Universal Life | The flexibility to change your premium, death benefit, and cash value over time | In your insurance company’s portfolio |
| Guaranteed Universal Life | Flexibility of a universal life policy with guaranteed rates of whole life | In your insurance company’s portfolio |
| Indexed Universal Life | Like universal life instead of interest rates in fixed indexed market | Fixed index stocks and options |
| Variable Life | Investing your cash value in the stock market rather than your insurance company | Stock market |
| Variable Universal Life | The flexibility to change your death benefit, investing in the stock market rather than your insurance company | Stock market |
How to use cash value life insurance during your lifetime
You can use the cash value of a permanent life insurance policy during your lifetime, for things such as paying your children’s college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.
One reason that people get permanent life insurance is for the cash value and ability to get loans tax-free without using other assets as collateral. It can be used to pay for children’s college tuition, fund a business, or purchase a second home.
If you borrow money or take out a loan against your permanent life insurance policy’s cash value, you don’t pay tax on the loan, but you will pay interest. The interest you pay is based on current market rates and can be fixed or variable depending on the type of permanent life insurance policy you have.
What if you don’t repay a loan on your permanent life insurance?
Williams said you can pay the loan back — or never pay it back, and keep the policy until you die. However, he noted if you die with an outstanding loan, the insurance company will reduce the death benefit payable to your beneficiaries by the outstanding loan amount.
If you have enough cash value or dividends on your policy, you could be able to use the dividends to pay back the loan, depending on the type of permanent life insurance product you have.
If you want to cancel your life insurance policy and you took out a loan that you haven’t paid back, you’ll need to contact your insurance company to start the process. The money you’ll receive back when you cancel a permanent life insurance policy is called cash surrender value.
If you cancel your insurance policy while you still have a loan, you will receive the cash value minus the outstanding loan balance and any fees associated with canceling your policy. You will also have to pay taxes on the cash value received. Before surrendering your permanent life insurance policy, consult an accountant or tax professional about the tax implications.
Consult an expert before taking a loan on your cash value life insurance
Permanent life insurance is more than a payout for your beneficiaries. It’s an opportunity to build wealth and fund your retirement through the cash value your policy accrues. If you’re considering taking a loan against your permanent life insurance policy, consult an accountant and financial advisor first.
You want to understand any tax implications, the impact on your death benefits in case you don’t pay back the loan, and how other assets are protected. This decision can’t be made in a vacuum because everyone’s needs vary. Involving an accountant and financial advisor can help you avoid making a decision that is not financially sound or advantageous for you.
Ronda is an attorney, writer, and entrepreneur. She is a contributing writer for the Huffington Post. Originally from Chicago, she has lived in Los Angeles and New York. She loves to travel and is passionate about education equity, especially for first generation college students.