Guide to Whole Life Insurance Cash Value

Kim Wilhelm CEO of Final Expense Direct Life Insurance
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Written by Kim Wilhelm

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Last Updated 03 Dec 2022

Whole life insurance is more than just a death benefit paid to your beneficiary when you die. There are different types of policies, you can add riders and other features, and there are terms that can be confusing, like accelerated death.

One feature in most whole life insurance policies is a cash value component. It’s only offered on permanent life insurance policies and can be used in several ways.

This guide to whole life insurance cash value will answer your questions about this policy feature, including what happens to it when you die.

What is Whole Life Insurance Cash Value?

Whole life insurance cash value is a savings account built into the life insurance policy. When you pay your premium each month, it’s divided up three ways. 

Part of the premium goes to pay for the cost of your insurance coverage. Some of it goes to pay for policy and operating costs. The rest goes into the cash value savings account.

When you buy whole life insurance, you not only lock in your premiums and coverage amount, you also lock in a guaranteed minimum accumulation rate. The insurance company predetermines the rate of return or interest rate  when you buy the policy. 

Cash value is a nice feature to have, but it’s not guaranteed in all whole life insurance policies. And you might get a better rate of return in a traditional savings account or CD compared to the rate determined by the life insurance company.

Guaranteed issue whole life insurance is one type of permanent life insurance that rarely offers a cash value savings account.

The other thing to keep in mind about whole life insurance cash value is the smaller the death benefit, the longer it takes for the cash value to grow. It can take years for the cash value to grow to a point where you can access it.

What Happens to Cash Value in a Whole Life Insurance Policy at Death?

When you pass away with a whole life insurance policy, your beneficiary receives the death benefit amount as outlined in your policy. Though there are exceptions, most whole life insurance cash value policies are “use it or lose it.” Meaning if you don’t use it while you’re still alive, your beneficiary won’t get it.

If you’re interested in cash value as part of your whole life insurance plan, ask the company:

  • What the rate of return is
  • How soon you can access the money
  • What happens to the cash value when you die

How to Use Your Whole Life Insurance Cash Value

There are several ways you can use your whole life insurance cash value. You won’t be able to use these methods until you’ve reached a certain amount of cash value in the account, which varies by company and policy.

Buy More Life Insurance

If you don’t actually need the cash value, you can choose to exchange it for a larger death benefit. The life insurance company will liquidate the cash value account and use the funds to increase your death benefit

This is a great way to give your beneficiary a larger pool of money to pay for your funeral or end-of-life expenses, or use as an inheritance. It also removes the “use it or lose it” aspect because now the insurance company won’t get to keep the cash value when you die.

Pay Your Premiums

Another option is to use the cash value to pay your premiums. Instead of you paying your premiums every month, the carrier will transfer the money from the cash value savings account. 

This method can free up some of your retirement income, but you should monitor the policy periodically, especially if you don’t have a large cash value balance. Eventually you might have to pay the premiums again.

Take Out a Loan

This is really only an option if you have a large cash value balance. But if you do, you can take out a loan against the whole life insurance policy. Life insurance companies can often beat interest rates of a bank loan.

Though you don’t have to pay back the loan, it will continue to accrue interest as long as there is an outstanding balance. And if you die before you pay back the loan, they deduct the total amount from the death benefit your beneficiary will receive.

Make a Withdrawal

If you don’t want to pay a loan back with interest, another option is to make a withdrawal. If you do this, however, it could have tax implications if the withdrawn amount is greater than the premiums you’ve paid. And if you don’t replace it, it will reduce the death benefit by the withdrawn amount.

Buy an Annuity

If you want more retirement income, another strategy is to buy an annuity with the cash value amount. You can do this tax free through a 1035 exchange. An annuity has its own pros and cons, and if you go this route, it will cancel out your whole life insurance policy.

Surrender the Policy

If you no longer have a need for whole life insurance, you can surrender the policy. By doing this, you’re canceling your life insurance so your beneficiary won’t receive anything when you die. There could be tax implications and you could pay surrender fees, which life insurance companies charge to deter people from cashing out their policy.

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How to Access Whole Life Insurance Cash Value

You can access your whole life insurance cash value by reaching out to the life insurance company. They will go over how much cash value you have and how much you can access. You’ll have to fill out a form authorizing your usage of the cash value. They will then mail you a check or direct deposit it into your account.

Life insurance companies won’t give you legal or tax advice, so it’s best to consult an attorney or tax advisor before you use your cash value to make sure you still want to use it. With several options to choose from, make sure you understand the method you’re choosing and that is the right option for you.

Keep in mind, accessing the cash value will reduce your death benefit, unless you pay the money back. For instance, if you remove $2,000 from the cash value and die before you pay it back, your beneficiary will only receive $18,000 of your $20,000 death benefit.

FAQ

How Does Cash Value Work on a Whole Life Policy?

Cash value acts like a savings account inside your whole life policy. Part of your premium goes towards the cash value and you can earn interest, which allows the amount to grow over time. You can access it in several ways, but it will lower your death benefit if you don’t repay what you take out.

When Should You Cash Out a Whole Life Insurance Policy?

You should only cash out a whole life insurance policy when you no longer need the death benefit. For instance, if you save up the money to pay for your funeral and other final expense, you may no longer need whole life insurance. In this instance, it may be worth it to cash out the whole life insurance policy.

How Long Does it Take to Build Cash Value on Life Insurance?

It usually takes at least 10 years to build cash value on life insurance before you can access it. How long it takes depends on the type of life insurance policy, your coverage amount, and your policy details.

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