What is cash value in life insurance and how can you use it? (2024)

FAQs

What is cash value in life insurance and how can you use it? ›

Cash value is the portion of your policy that accumulates¹ over time and may be available for you to withdraw or borrow against for long-term savings needs such as retirement, paying down a mortgage, covering an unforeseen emergency, or a significant expense, like sending your child to college.

If you have a permanent life insurance policy that has accumulated cash value, then yes, you can take cash out before your death.

Cash value: In most cases, the cash value portion of a life insurance policy doesn't begin to accrue until 2-5 years have passed. Once cash value begins to build, it becomes available to you according to your policy's guidelines.

How long does it take to borrow against life insurance? It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return.

Though they are tax-advantaged, policy loans and withdrawals do have one major downside: The more you take out, the less your beneficiaries will receive. It's also worth noting that cash value will not build up quickly.

A typical life settlement is worth around 20% of your policy value, but can range from 10-25%. So for a 100,000 dollar policy, you would be looking at anywhere from 10,000 to 25,000 dollars.

If you opt into a life insurance policy that allows you to use living benefits, you'll probably wonder what that means. It means you can use the accrued cash value or death benefit while you are alive, depending on the benefit utilized.

Similar to proceeds of other life insurance policies, the income from a cash value life insurance policy isn't taxable when taken as a lump sum. Beneficiaries can accept the full death benefit payout of their life insurance policy tax-free.

Cash value is the portion of your policy that accumulates¹ over time and may be available for you to withdraw or borrow against for long-term savings needs such as retirement, paying down a mortgage, covering an unforeseen emergency, or a significant expense, like sending your child to college.

What happens to the cash value after the policy is fully paid up? ›

What happens to the cash value after the policy is fully paid up? The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums.

Examples of Cash Value Life Insurance

An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.

You will typically find it listed separately in your life insurance statements. The net cash value will generally be lower than your total accumulated cash value for the first several years of coverage, as it's reduced by fees and surrender charges.

Borrowing against life insurance can be a good option for those looking for a loan with low-interest rates, flexible repayment terms and no credit check. However, it also comes with downsides like a reduced death benefit, risk of policy lapse and significant interest accumulation.

If you have a permanent life policy, you might be able to pull money from the policy when you're still alive by dipping into its cash value. Types of permanent life insurance policies include whole life, universal life and variable universal life.

The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. When your policy has enough cash value (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company.

You could potentially take a loan from your policy, withdraw the cash value it's accrued over time, use a living benefit rider or sell your policy. A financial advisor can help you integrate a life insurance policy into your financial plan. Find an advisor today.

You can cash out a life insurance policy. How much money you get for it will depend on the amount of cash value held in it. If you have, say $10,000 of accumulated cash value, you would be entitled to withdraw up to all of that amount (less any surrender fees).