What Is Cash Value?

Permanent life insurance has an attractive feature: it has a “cash value.”

The cash value is the amount the policy is worth if it is cancelled or “surrendered” while you're still alive. The cash value won't be as much as "benefit value" — the amount the policy would payout when you pass on. But the cash value can grow large enough to make life insurance a useful tool for investing.

How It Works

When you pay the monthly premium on a permanent life insurance, part of your payment goes toward paying for the coverage. The other part adds to the cash value.

If you buy a permanent life insurance policy when you're still young, the majority of your premium payment will go toward the cash value. As you get older, more and more of your premium will start going toward the benefit value. In a whole life policy — a kind of permanent life insurance — your premiums don't increase. This means that the cash value grows more slowly as you get older.

As your cash value builds, you can draw money from it. This is usually done in the form of a loan against the policy's cash value. You can also withdraw money under some circumstances — but this may reduce the benefit value of the policy.

The cash value in your policy draws interest — usually about 6% a year. And it’s “tax-deferred.” That means you don't pay taxes on it unless you withdraw money.

Is It Right For You?

Permanent life insurance is most popular for people who anticipate having a relatively large estate as they grow older. Because the cash value builds quickly while you’re young, you can use that cash value to pay the premiums when you retire. This can decrease the benefit value, but there will generally be enough left over to cover the “estate taxes” when you pass on.

Although permanent life insurance can be used as an investment tool, financial experts are quick to point that there are many other more effective ways to invest your money. In some states, it is against the law to advertise permanent life insurance as an “investment” for that reason.

Instead of choosing permanent life, many people get a term life policy. The premiums are much lower, and the amount saved can be invested for retirement.

If you're unsure what the best option for you is, talk with a life insurance agent. Use our free online service to get matched with agents licensed in your area.