Cash Value Life Insurance: How It Grows and How You Can Use It

What cash value is, how it builds in whole, universal and variable policies, and how loans, withdrawals and surrenders affect your coverage and taxes.

Life Insurance Knowledge · Last reviewed October 26, 2026 · 6 min read

Cash value is the savings-like part of a permanent life insurance policy. It is the reason whole life, universal life and variable life cost more than term coverage, and it is also what lets a policyowner get money out of a policy while the insured person is still alive.

It is easy to think of cash value as a bank balance, but it doesn't quite work that way. Getting at it can shrink your death benefit, trigger surrender charges, create a tax bill or even end the policy. Understanding the rules before you need the money makes all of that easier to manage.

This guide is general information, not financial, insurance, tax or legal advice. Before acting on a specific policy, talk with your insurer, a licensed professional or a tax advisor, and contact your state insurance department if you have a problem.

What cash value is

The NAIC explains that cash value policies have savings or investment features that make it possible for policyowners to get money from the policy while they are alive. The Texas Department of Insurance (TDI) describes the mechanics: a portion of each premium goes into an account called the cash value, which grows at a fixed or variable rate, or is tied to indexes or to subaccounts you choose.

Two related terms show up on statements:

Cash value is the amount that has built up in the policy.
Cash surrender value is what you would actually receive if you canceled. New York's Department of Financial Services (DFS) defines it as the cash value minus any surrender charge and any outstanding loans and interest.

The gap between those two numbers can be large in the early years.

How cash value grows in different policies

How the value builds depends on the type of policy:

Whole life. New York DFS explains that level premiums are higher than the cost of protection in early years, and the extra builds a reserve. Washington's Office of the Insurance Commissioner says the cash value grows based on the interest rate the insurer sets each year. Participating policies may also pay dividends that can be left in the policy.
Universal life. Premiums go into an account, the insurer deducts the cost of insurance and expenses, and the balance earns credited interest, with a minimum rate stated in the policy.
Variable and variable universal life. Washington's insurance office explains that the value depends on the investment accounts you choose, and you take the investment risk.

Whatever the type, patience is built in. TDI says it takes a policy years to build cash value. The NAIC notes that some policies have low values in the early years that build later, while others build more gradually, and suggests asking for a year-by-year display of values and benefits. TDI adds that the charts agents show are usually projections, not a promise of performance.

TDI also notes that cash value growth is tax-deferred, so you generally don't pay tax on it while it stays inside the policy. New York DFS explains that a 1984 federal tax law set requirements a permanent policy must meet to receive that preferred tax treatment, including limits on how much premium can be paid relative to the face amount.

Way 1: Borrow against it

Most cash value policies let you take a policy loan. New York DFS says policies generally allow loans up to the amount of the cash value, at a specified or variable interest rate. The trade-off is simple: outstanding loans that aren't repaid reduce the death benefit. The NAIC confirms that unpaid loans plus interest are subtracted, so beneficiaries could receive less than the face amount.

On taxes, Washington's insurance office explains that a policy loan generally isn't taxable, but if the policy terminates before you've repaid the loan, you might owe tax. That is a real risk if loan interest keeps compounding against a shrinking cash value.

Way 2: Withdraw part of it

Some policies, particularly universal life, let you withdraw part of the cash value. TDI lists the cautions: you might pay a surrender fee if you withdraw early; if you withdraw more than you paid in premiums, you will probably owe tax on the excess; and if you withdraw the entire cash value, the company might cancel the policy. Before you withdraw, ask the insurer exactly how the withdrawal would affect your death benefit and future premiums.

The NAIC adds a warning for paid-up policies: the company plans to use the cash value to pay premiums until death, and taking cash out could mean you must resume paying premiums or accept a smaller death benefit.

Way 3: Use it to pay premiums

Cash value can help keep a policy going. TDI notes it can be used to pay premiums. New York DFS describes an automatic premium loan provision that, if you elect it, pays an overdue premium at the end of the grace period with a loan from the cash value, preventing an accidental lapse. It is still a loan, so it reduces the death benefit until repaid.

Way 4: Surrender the policy or use nonforfeiture options

You can cancel a policy and take the cash surrender value. IRS Publication 525 (for 2025 returns) says that if you surrender a life insurance policy for cash, you must include in income any proceeds that are more than your cost, which is generally the total premiums you paid minus any refunded premiums, rebates, dividends or unrepaid loans that weren't included in your income. You should receive a Form 1099-R showing the taxable part.

If you want to stop paying but keep some coverage, New York DFS describes nonforfeiture options: use the cash value to buy extended term insurance, or reduced paid-up insurance that continues coverage at a lower amount with no further premiums.

Modified endowment contracts: a tax trap to ask about

Some policies are classified as modified endowment contracts (MECs), as defined in section 7702A of the Internal Revenue Code, and IRS publications treat them differently. Publication 575 (for 2025 returns) excludes MECs from the rule that lets ordinary life insurance distributions be taxed only after they exceed your cost, and Publication 550 (for 2025 returns) excludes MECs from the rule that treats paid-out dividends as a return of premium. Before buying a policy or adding extra money to one, ask the insurer in writing whether it is or would become a MEC, and talk with a tax professional.

Other effects to keep in mind

Means-tested benefits. TDI's guide says that a policy's cash value is considered an asset when determining whether you can get Medicaid. Eligibility rules differ by state, so check with your state's Medicaid agency.
Creditors. TDI says that in Texas, cash value and death benefits are usually exempt from creditors. Rules differ by state, so check yours.
Replacement pitches. TDI's insurance fraud guide (updated June 16, 2026) warns about agents who urge you to cash in an existing policy to buy a new one and says doing so during the first three to five years can cause you to lose money.

Key takeaways

Cash value builds slowly, and the surrender value can be much lower than the account value early on.
Loans and withdrawals reduce the death benefit; a loan outstanding when a policy terminates can create a tax bill.
Surrender gains above your cost are taxable, according to IRS Publication 525.
Ask whether a policy is or would become a modified endowment contract before adding money.
Cash value can affect Medicaid eligibility, and creditor rules vary by state.

Sources

Our articles are general information, not financial, insurance, tax or legal advice, and we don't sell insurance or recommend specific companies or products.

Spotted something out of date? Let us know.