How Cash Value Builds in a Life Insurance Policy

Life insurance can be a valuable tool to help protect your loved ones from financial strain in the even of your death, but some forms of life insurance have other benefits as well.

Cash-value life insurance, also known as permanent life insurance, includes cash value component in addition to the death benefit. You can typically access this cash value before your policy ends, such as by taking out a loan to pay for other life expenses. Variable life, whole life, and universal life insurance all have built-in cash value, term life insurance does not.

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

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 as your fixed premiums are split into three categories.
  • One portion of your premium go toward the death benefit, one portion toward the insurer's costs and profits, and one for the 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 will go toward your policy’s cash value.

In most cases, cash value doesn't begin to 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.

Accumulation Slows Over Time

When you have cash-value life insurance, you generally pay a level premium. 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 term life policy. 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.


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 since 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 important 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 you purchase a whole life policy with a $1 million death benefit when you’re 25. You consistently pay your monthly premium, and every month a percentage of that payment goes toward the cash value of your policy.

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.

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. At the time of your death, cash value in your policy goes back to the insurance company, not your heirs.

Whole Life Insurance Cash Value Chart

Here is detailed hypothetical example of how cash value accumulates over time.

Whole Life Cash Value Accumulation for a $100,000 Policy
Policy Year Age Annual Premiums Cash Value Death Benefit
 5  40  $1,178  $3,738 $100,370
 10  45  $1,178  $11,569 $101,513
 20  55  $1,178  $33,838  $114,625
 30  65  $1,178  $72,398  $144,881
 35  70 $1,178   $99,839  $166,343
50  85 $1,178   $228,317  $271,184
 55  90 $1,178   $289,301  $323,334
Cash value accumulation for a whole life policy with premiums paid out of pocket starting at age 35 for a non-smoking male.

This chart provides a closer look at how cash value accumulation can work within a whole life policy, assuming all premiums are paid out of pocket.

How Fast Does Cash Value Build in Life Insurance?

Cash value can build 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, does not build cash value.

Can you Withdraw Cash Value from Whole Life Policy?

You can withdraw cash value from your permanent or whole life insurance policy before your death. 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 fees. Finally, you can take out loans against your cash value.

Article Sources
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