Whole life cash value, explained simply

Many people know whole life insurance pays a benefit when you pass away. Fewer know that whole life cash value can also build a pool of money while you're living.

In this post, we'll walk through what cash value is, how it grows and how families may use it. If you're still choosing between policy types, our guide to term vs. whole life is a good place to start.

What cash value is

Whole life insurance is a type of permanent coverage. As long as premiums are paid, it's designed to cover you for life.

Whole life combines a death benefit with a savings element. That's one reason its premiums tend to be higher than term premiums.

Think of cash value as savings that live inside your policy. It belongs to the policy owner, but it follows the policy's rules.

How whole life cash value grows

Your policy includes a cash value table. The guaranteed values shown there are what the policy states you'll have, as long as premiums are paid as scheduled.

Some policies, called participating policies, may also pay dividends. Dividends depend on how the insurance company does, so they are not guaranteed.

If dividends are paid, you may have choices for how to use them:

• Buy small amounts of extra paid-up coverage
• Lower your premium
• Take them as cash
• Leave them with the insurer to earn interest

With many policies, cash value is low in the early years and builds more later. Many policies also have surrender penalties if you drop them early, so whole life tends to work best when you plan to keep it.

Ways you may be able to use it

Cash value can give you options later in life. Here are the most common ones.

Policy loans. You can usually borrow against your cash value. Any unpaid loan, plus interest, is subtracted from the death benefit.

Withdrawals. Some policies let you take money out directly. This can lower your death benefit and may change what you owe in premiums.

Surrender. You can cancel the policy and take the cash value. Coverage ends, and any amount above what you paid in is generally taxable.

You can read more about how this coverage works on our whole life insurance page.

Common questions

Can you borrow against whole life cash value?

Usually, yes, once the policy has built enough cash value. Loans charge interest, and any unpaid balance is taken out of the death benefit your family receives.

Is whole life cash value taxable?

Cash value growth is generally tax-deferred while it stays inside the policy. How loans and withdrawals are taxed depends on how the policy is set up and kept in force.

For example, a policy funded too quickly can become a modified endowment contract, which changes how withdrawals are taxed. A tax professional can help with your situation.

Bottom line

Whole life cash value is a savings feature that grows inside your policy over time. Its guaranteed values are spelled out in the policy, while dividends can vary.

It can be a helpful tool for families who want lifelong coverage and plan to keep it. To weigh the cost, read our post on whether whole life is worth the higher premium.

Have questions about your situation? Book a complimentary call with our team.

This article is for general education only and isn't financial, tax or legal advice. Product features vary by carrier and state. Talk with a licensed professional about your situation.