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All life insurance has the same primary purpose: to provide a death benefit to your beneficiaries if you pass away. The policy's death benefit is paid income tax free and can be a significant source of financial protection for your family: they can use the funds in any way they need, from paying off the mortgage to daily living expenses and paying for college.1 But some policies also have a cash value component: As you pay life insurance premiums, a portion goes towards the death benefit, and another part can grow tax-deferred over time.2 This cash value can become a significant financial asset that can be accessed many times throughout your life.3

What types of life insurance have cash value?

If you’re interested in life insurance that builds cash value, you may need to purchase a permanent life insurance policy. There are a few different types to choose from:

Whole life insurance

This is the most common type of cash value policy and offers the most guarantees, with a guaranteed death benefit, fixed premium payments that never go up, and cash value that grows tax-deferred at a predictable, set rate.4 If you get a policy from a mutual insurer, like Guardian, it may also earn dividends based on company performance because these insurance companies are owned by their policyholders.5

Universal life insurance

This offers greater flexibility, with premium payments that can adjust up or down within a certain range, along with the death benefit amount.6 This can let you adjust your coverage and costs as your needs and income change. The cash value portion grows tax-deferred based on interest rates declared by the life insurance company.

Variable universal life insurance

This lets policyholders invest the cash value portion in a variety of investment options.7 Cash value growth depends on the performance of those investments, offering more risk – and potential reward – compared to other types of cash value life insurance.

Indexed universal life insurance

This gives policyholders the opportunity to build cash value based on the performance of an underlying index, such as the S&P 500.8 Policyholders are protected against market downturns with a minimum guaranteed interest rate, but annual gains are also capped, so this type of policy offers less risk and growth potential compared to a variable policy.

Note: Term life insurance ––– which lasts for a limited period of time (typically from 10-30 years) –– offers a death benefit but does not build any cash value.

How does cash value life insurance work?

A cash value life insurance policy effectively has two main parts: the death benefit, which is payable in full, from the first day the policy is in effect, and a cash value that grows over time.

When you pay premiums, a portion of your payment goes toward covering the cost of insurance (i.e., the death benefit) plus any administrative fees and other policy expenses. The remaining portion can help grow your cash value based on how much you pay in, and investment performance based on the type of policy you have (see above).

Cash value life insurance is tax-efficient — which means it helps your money grow faster because interest and investment earnings on the cash value aren’t taxed. Like other types of financial vehicles, it takes a little while for your money to grow into a usable sum. Still, once that happens, there are a variety of ways to access policy cash to help you achieve financial goals, such as paying for a child’s college tuition, starting a business, or supplementing your retirement income.

How can you cash out or take advantage of cash value?

A cash value life insurance policy gives you several ways to access the cash value you've accumulated. Before doing so, you should talk to your financial professional and a tax advisor to determine the best choice for you.

  1. Withdrawals: Policyholders can make partial withdrawals from the cash value, which are generally tax-free up to the amount of the premiums paid. Any additional withdrawals may be subject to taxes or penalties, depending on the policy and the amount withdrawn.

  2. Loans: Policyholders can take out a loan against the cash value, using the policy as collateral. Loans can provide access to funds without triggering immediate taxes or surrender charges. However, outstanding loan balances will typically reduce your death benefit if not repaid.

  3. Surrender: Surrendering the policy involves canceling the coverage and receiving the cash value accumulated in the policy. This option may trigger surrender charges by the insurance company, particularly if you cancel in the early years of the policy.

  4. Paying Premiums: In most cases, the cash value can be used to pay premiums. This can be useful if you want to reduce expenses — for example after you retire — but still wish to maintain full coverage.

What are some of the benefits of cash value life insurance? And what about drawbacks?

The decision to purchase this type of policy depends on your individual circumstances and financial goals. If you’re trying to decide if it’s a good fit for you, here are some benefits to consider:

  1. Can help achieve long-term financial goals: A cash value policy can serve as a key component of your long-term financial strategy, providing both protection and potential savings for retirement or other financial needs.

  2. May be useful for estate planning: If you have substantial assets and wish to pass them on to your beneficiaries while avoiding the delays and uncertainties of the probate process, a cash value policy can be an effective tool. You may also realize certain tax advantages, but you should consult your tax advisor first.

  3. Coverage doesn’t end: If you need life insurance coverage for your entire lifetime rather than a specific term, cash value life insurance policies such as whole life insurance can provide a guaranteed death benefit payout — at a predictable cost — for as long as needed. This can be essential in certain situations, such as if you want to provide for a special needs child after you're gone.

  4. Supplement retirement income: These policies can help supplement retirement income, especially if you have maxed out other tax-advantaged retirement accounts such as IRAs.

Drawbacks to consider may include:

  1. Cost: Cash value policies usually have higher premiums than term life insurance policies with comparable death benefits.

  2. Complexity: Cash value policies are usually more complicated than term life insurance policies, so you'll probably need to spend more time understanding and managing your coverage.

  3. Potential for reduced death benefit: Withdrawals and loans from your cash value account can change your policy’s death benefit. For instance, if you take a policy loan and fail to repay it by the time of your death, the outstanding loan amount, along with any accumulated interest, will be deducted from the death benefit. Similarly, when you withdraw life insurance cash from your cash value account your death benefit will be reduced by the amount withdrawn.

Is cash value life insurance right for you? Speak to Guardian and find out.

Permanent life insurance that builds cash value can be a powerful financial tool to help protect your family and lifestyle. Generally, it can be a good fit for those who would like a tax-efficient growth vehicle in addition to the lasting financial protection of a permanent death benefit. That said, every individual's situation is unique, so if you need help deciding, now would be a good time to discuss your needs and circumstances with a financial professional. If you don't know such a person, ask friends or colleagues for a recommendation. Or, Guardian can connect you to a Financial Professional who can help.

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FAQs

Frequently asked questions about cash value life insurance

As with other financial products, that depends on a person’s life situation and goals. Is it a good option for you? There are different kinds of cash value, permanent life insurance policies to consider. For example, a whole life insurance policy can provide financial confidence that other products may not, with protection that lasts your entire life at guaranteed level rates. And whole life insurance cash value grows at a guaranteed rate unaffected by financial markets. On the other hand, universal life policies can be less expensive while giving you the flexibility to adjust premiums within a certain range, but in certain circumstances, you may have to pay higher premiums to maintain coverage.

Yes, you can generally withdraw the available cash value from a permanent life insurance policy. There are several ways to do this: You can simply withdraw funds; you can borrow against the cash value, using your policy as collateral; you can cancel the policy entirely and receive the full cash surrender value; you can use the cash value to pay your premiums. Whether or not a specific policy allows all these methods depends on the policy terms and conditions.

Cash value takes time to grow, and there is no one "correct" answer because the total cash value at any point depends on several factors, including the monthly premium, how long the policy has been in force, and the specific terms of the policy. That said, here is an example: A 50-year-old male paying approximately $30 monthly for a $10,000 whole life plan might have an estimated cash value of $1,500-$2,000 after ten years.

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

4 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

5 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

6 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

7 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. Its crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

8 An Indexed Universal Life (IUL) policy is not considered a security. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of a stock index with a cap rate (i.e. 10%), a floor (i.e. 0%), and a participation rate (i.e., 100%). This type of universal life policy may lapse due to low or negative performance of the stock index, inadequate funding, and increasing cost of insurance rates.