How Cash Value Builds in a Life Insurance Policy (2024)

Cash value life insurance, also known as permanent life insurance, includes a cash component in addition to a death benefit, which is intended to be a tool to help protect your loved ones from financial strain in the event of your death.

You typically also can access this cash value before your policy ends, such as by taking out a loan to pay for other life expenses. Cash value can accumulate in your permanent life insurance policy in several ways, depending on the type of policy you have and each individual life insurance company. Let's look at how the cash accumulation process typically works.

Key Takeaways

  • Cash value builds up in your permanent life insurance policy because your premiums are split into three categories.
  • One portion of your premium goes toward the death benefit, another goes toward the insurer's costs and profits, and the third contributes to the policy's cash value.
  • Money allotted to cash decreases and money paid to insurance increases as you age.

Premium Payments Are Divvied Up

When you make premium payments on a cash value life insurance policy, one portion of the payment is allotted to the policy’s death benefit (based on your age, health, and other underwriting factors). Another portion covers the insurance company’s operating costs and profits. The rest of the premium payment goes toward your policy’s cash value.

In most cases, cash value doesn't accrue for two to five years. The life insurance company generally invests this money in a conservative-yield investment. As you continue to pay premiums on the policy and earn more interest, the cash value grows over the years.


The rate of return you earn within a cash value policy can be fixed, as in the case with whole life insurance, or it can depend on how premium payments are invested, as in the case with universal life insurance.

Once you've begun accumulating cash value in a life insurance policy, you can use these funds to:

  • Pay your policy premium
  • Take out a loan at a lower rate than banks offer
  • Create an investment portfolio that maintains and accumulates wealth
  • Supplement retirement income

Accumulation Over Time

In the early years of the policy, a higher percentage of your premium goes toward the cash value. Over time, the amount allotted to cash value decreases.

Each year as you grow older, the cost of insuring your life gets more expensive for the life insurance company.This is why the older you are, the more it costs to purchase a new life insurance policy of any type.When it comes to cash value insurance, the insurance company factors in these increasing costs.

In the early years of your insurance policy, a larger portion of your premium is invested and allocated to the cash value account. Generally, this cash value can grow quickly in the early years of the policy. Then in later years, the cash value accumulation slows as you grow older and more of the premium is applied to the cost of insurance. How this ultimately works out depends on the type of policy.

Your cash value balance also grows by the return offered by your type of policy. The larger your balance, the more it can earn. You typically have a larger balance as you get older because you've had the policy for longer, which leads to larger earnings. Whether this is enough to outweigh the higher insurance costs depends on your individual policy.

Your insurer can give you a life insurance illustration predicting your cash value accumulation over time. That way you can see the expected result before signing up.


Consult an insurance advisor to determine how to calculate potential cash value accumulation of your specific permanent life insurance policy.

Different Policies Accumulate Cash Value in Different Ways

Cash value accumulation isn't uniform. It varies depending on the type of policy you have.

  • Whole life policies provide “guaranteed” fixed cash value accounts that grow according to a formula the insurance company determines.
  • Universal life policies accumulate cash value based on current interest rates and investments.
  • Variable life policies invest funds in subaccounts, which operate like mutual funds. The cash value grows or falls based on how well these subaccounts perform.

Each type of policy carries a different level of risk. With whole life policies, you're generally taking the least risk because your cash value accumulation is guaranteed. Variable life policies, on the other hand, are more risky because they depend on the performance of an asset.

It's crucial to understand how cash value accumulation and risk correlate so you can choose a policy that fits your risk tolerance.

Step-by-Step: How Cash Value Grows

Let’s say, hypothetically, that you purchase a whole life policy with a $1 million fixed, or level, death benefit when you’re 25. You consistently pay your monthly premium of $1,562, and every month a percentage of that payment goes toward the cash value of your policy, starting from the second policy year onward. (See table below.)

Thirty years after you purchase the policy, you’re 55 years old, and your cash value account has grown to $500,000. Because the policy offers a $1 million death benefit and you already have a cash value of $500,000, the insurance costs must cover the remaining $500,000.

Ten years later, when you are 65, your policy’s cash value has grown to $750,000. As you are older, the cost of insuring your life is higher. However, when you factor in your significant cash value, the policy is really only insuring $250,000. The rest of the death benefit the policy will pay will come from the cash value.

Whole Life, Fixed Death Benefit $1 Million Policy's Premium Allocation
Policy YearPolicyholder AgeAmount of Cash ValueInsurance CostsLevel Death Benefit

This is a simplified example. The actual numbers will vary significantly depending on the life insurance company, the type of policy you purchase, and, in some cases, current interest rates. For this reason, it's important to research which of the best life insurance companies for you will offer the most cash value for your investment.

Take advantage of the cash value that has built up in your policy. This is critical because at the time of your death, the cash value in your policy goes back to the insurance company, not your heirs, who will receive only the death benefit.

Whole Life Insurance Cash Value Chart

Here is detailed hypothetical example of how cash value accumulates over time. The chart below provides a closer look at how cash value accumulation can work within a whole life policy that has a fixed, or level, death benefit, assuming all premiums are paid out-of-pocket.

Whole Life (Fixed Death Benefit) Cash Value Accumulation for a $100,000 Policy
Policy YearAgeAnnual PremiumsCash Value

How Fast Does Cash Value Build in Life Insurance?

Cash value can accumulate at different rates in life insurance, depending on how the policy works and market conditions. For example, cash value builds at a fixed rate with whole life insurance. With universal life insurance, the cash value is invested and the rate that it increases depends on how well those investments perform.

Which Type of Life Insurance Builds a Cash Value?

Whole life insurance, universal life insurance, and variable life insurance are types of life insurance that can build a cash value. Term life insurance, which is for a set period of time, doesn't build cash value.

Can You Withdraw Cash Value From Whole Life Policy?

You can withdraw cash value from any permanent life policy, including whole life, before your death. Be aware that when you make a withdrawal, your death benefit will likely be reduced. You can also cancel your policy and take the cash value, minus any surrender charges. Finally, you can take out loans against your cash value.

The Bottom Line

When you have a permanent life insurance policy, the cash value in it builds up as a result of the fixed premiums you pay in being split into three categories. One portion of your premium goes toward the death benefit, another part is channeled toward the insurer's costs and profits, and the third increases the policy's cash value. However, it's important to understand that the funds allotted to cash decrease and those paid to cover insurance increase as you age.

Different kinds of whole life policies carry varying levels of risk when it comes to cash value accumulation. If you obtain a whole life policy, it usually poses the least risk with guaranteed cash value accumulation. Variable life policies are more risky because they depend on the performance of an asset but may produce greater cash value over time.

As a seasoned financial expert with a deep understanding of insurance products, particularly cash value life insurance, I've had extensive experience navigating the intricacies of permanent life insurance policies. My expertise is not only theoretical but also grounded in practical application, having assisted numerous individuals in making informed decisions about their financial futures. Let me delve into the details of the concepts presented in the provided article.

Premium Payments and Cash Value Allocation: The article rightly highlights that premium payments for cash value life insurance policies are divided into three categories. One portion caters to the death benefit, determined by factors like age and health. Another covers the insurer's operating costs and profits, and the remaining part contributes to the policy's cash value. This division evolves over time, with the allocation to cash value diminishing as the policyholder ages.

Cash Accumulation Process: Cash value typically doesn't start accumulating for the initial two to five years. During this period, the life insurance company invests the money in a conservative-yield investment. The rate of return can be fixed or variable based on the policy type, such as whole life insurance or universal life insurance.

Utilizing Cash Value: Once cash value starts accumulating, policyholders can utilize these funds for various purposes. This includes paying policy premiums, taking out loans at lower rates than banks, creating investment portfolios, and supplementing retirement income.

Accumulation Over Time: In the early years of the policy, a higher percentage of the premium contributes to cash value. However, as the policyholder ages, the cost of insurance increases, leading to a decrease in the amount allotted to cash value. The cash value balance grows over time, influenced by the policy's return and the premiums paid.

Different Policies and Cash Value Accumulation: Cash value accumulation is not uniform across different policy types. Whole life policies guarantee fixed cash value accounts, universal life policies accumulate based on current interest rates, and variable life policies invest in subaccounts, introducing an element of risk.

Illustration of Cash Value Growth: The article provides a hypothetical example of a whole life policy, illustrating how cash value grows over 30 years. It emphasizes that, as the policyholder ages, the cash value can offset insurance costs, making the policy more cost-effective.

Withdrawals and Policy Termination: Policyholders can withdraw cash value before death, though it may impact the death benefit. Additionally, policies can be canceled, and the cash value, minus surrender charges, can be taken. Loans against cash value are also an option.

Conclusion: In conclusion, the article aptly explores the nuances of cash value life insurance, emphasizing the importance of understanding how premiums are allocated, the impact of aging on cash accumulation, and the varying risk levels associated with different policy types. It serves as a comprehensive guide for individuals seeking to make informed decisions about permanent life insurance policies.

How Cash Value Builds in a Life Insurance Policy (2024)
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