What’s the Cash Value of Permanent Life Insurance?

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

When most people think about life insurance, they focus on the financial protection it provides loved ones after they’re gone. But some life insurance policies can provide benefits while you’re living.

Many permanent life insurance policies build cash value over time. As premiums are paid, cash value can accumulate within the policy on a tax-deferred basis. Over the years, that cash value may become a source of financial flexibility that can be used for short-term costs—like a down payment for buying a home—or long-term goals.

That’s one reason permanent life insurance is often viewed as more than just insurance. Along with providing lifelong protection, it can become a financial asset that offers stability, flexibility, and access to value during your lifetime while helping support a broader financial plan.

Here’s a closer look at how cash value life insurance works, how cash value accumulates, when you can access it, and how it may fit into your overall financial strategy.

What is cash value life insurance?

All life insurance policies include a death benefit, which is the sum of money paid out to your beneficiaries upon your death. Many people get temporary policies that will pay a death benefit only if you die in a specified time frame, usually 10, 20, or 30 years—known as term life insurance.

But permanent life insurance pays a death benefit no matter when you die provided the policy stays in force. This category of life insurance is also sometimes referred to as “cash value” life insurance because it’s the type of insurance that accumulates cash value.

The difference between the two types of insurance is kind of like the difference between renting or buying a home. The benefit of either is that you get a place to live. But when you rent, as soon as you stop paying, you no longer have the benefit of the place to live. When you buy, over time, you build equity in your home, and eventually you will own it. Permanent life insurance is similar.

What kind of life insurance policies have cash value?

While permanent life insurance is the category of insurance that typically builds cash value, there are several different types of permanent insurance that work in different ways:

• Whole life insurance
• Universal life insurance
• Variable universal life insurance

How does the cash value of your life insurance policy accumulate?

As you pay premiums on a permanent life insurance policy, some of the premium helps pay for your insurance coverage, while another portion contributes to the policy’s cash value. Over time, that cash value grows inside the policy tax-deferred.

The amount of cash value that accumulates depends on factors such as the type of policy you own, the premiums paid, the policy’s design, and how long you’ve owned the policy. It can take a few years to build up to a useful amount.

Here are some considerations depending on the type of policy you own:

• Whole life insurance: Cash value growth is guaranteed and does not fluctuate with stock market performance. Some policies may also pay dividends¹, which can increase both the policy’s death benefit and cash value when used to purchase paid-up additions.
• Universal life insurance: This offers flexibility regarding premium payments and death benefit, which can affect how cash value grows and whether the policy remains in force.
• Variable universal life: This provides exposure to financial markets, but it also comes with investment risk. Depending on the performance of the underlying investment options, the cash value could decline.

How long does it take to build cash value?

Cash value begins accumulating soon after a permanent life insurance policy is in force. But it may take several years before that value becomes substantial.

During the early years of a policy, a larger portion of premiums generally goes toward establishing and maintaining coverage. As the policy matures, cash value can grow more meaningfully.

Because every policy is different, the exact timeline varies. The amount of cash value available depends on things like your policy type, premium level, and when the policy started.

What can you use your policy’s cash value for?

Once you accumulate cash value, you can use it for anything you need. There are no rules that state you can access it only after a certain age, in certain situations, or for certain reasons.

Some common reasons to access cash value include to:

• Cover an emergency,
• Fund retirement income need during a down market,
• Make a down payment on a mortgage,
• Remodel a home,
• Pay for a wedding,
• Help your child pay for college,
• Take advantage of a business opportunity, and
• Pay off high interest of “bad debt.”

Some people use cash value as part of a broader retirement strategy. Because cash value in whole life insurance isn’t tied to market performance, it may provide another source of funds during market downturns, allowing investment assets additional time to recover.

What happens when you withdraw cash value from your life insurance?

Withdrawing cash value can reduce the death benefit of your life insurance policy, meaning the beneficiaries receive less when you die. Borrowing against your policy will reduce your death benefit until you pay back the loan, and you will pay interest on the loan as well.

You may be able to withdraw cash value from your policy permanently—meaning you wouldn’t have to pay a loan back—but these options ultimately impact your life insurance coverage and can result in you forfeiting your coverage entirely.

In many situations, policy loans are not considered taxable income. However, surrendering a policy or withdrawing amounts above your cost basis (your premiums paid into the policy) may create tax consequences. Because tax treatment can vary based on your circumstances, it may be helpful to consult a financial or tax professional before accessing cash value.

How can you access the value of your life insurance policy?

Generally, you can access the cash value of your life insurance policy in one of three ways:

Take out a life insurance loan

This option allows you to borrow money from your life insurance company with the policy’s cash value acting as collateral. Think of this as kind of like a home equity line of credit: The insurance company extends you credit with your policy as collateral.

If you take out a life insurance loan, you’ll ultimately need to pay it back—with interest. And it’s important to know that if you pass away while you have a loan out on the policy, it may reduce the benefit your loved ones get, because the death benefit will go toward paying off the loan.

Pros and cons of taking a loan from your life insurance policy

Pros:

• A loan provides access to cash value while keeping your life insurance coverage in place.
• It can offer financial flexibility when opportunities or unexpected expenses arise.
• Policy loans are generally not considered taxable income when managed properly.
• There are typically no restrictions on how the money can be used.
• Policy loans generally do not have a fixed repayment schedule, but interest accrues and an unpaid balance can reduce policy values and the death benefit or contribute to lapse. Your loan will not be taxed as income, and the loan won’t impact your credit.

Cons:

• Any outstanding loan balance can reduce the death benefit your beneficiaries receive.
• Interest accrues on borrowed amounts.
• If loans become too large relative to your cash value, they can affect the policy’s long-term performance and potentially cause the policy to lapse.
• Cash value is designed to provide flexibility, but it isn’t the same as a checking or investment account and should be used thoughtfully.

Partial surrender

A partial surrender allows you to give up a portion of your life insurance policy (reducing the death benefit) and take that portion of your cash surrender value. You won’t have to pay back what you take out, but you’re giving up a portion of your death benefit for good. Doing this can also have tax implications. If the cash value you take out equals more than the basis you paid in, you could be taxed on distributions above that amount.

Pros and cons of a partial surrender of your life insurance policy

Pros:

• It provides access to a portion of your policy’s cash value without taking on loan repayment obligations.
• It can help address a specific financial need while maintaining some life insurance protection.

Cons:

• It permanently reduces your death benefit.
• Future cash value growth may be lower because less value remains in the policy.
• Withdrawals above your cost basis may create taxable income.
• Once withdrawn, those funds generally cannot be put back into the policy.

Total surrender

A total surrender allows you to access all your cash value but requires you to forfeit your entire policy—meaning you will give up the entire death benefit. This can also have tax implications, and some companies may require you to pay an additional surrender charge. Depending on your policy, this can be as high as 10 to 35 percent, based on how many years you’ve had the policy.

As with a partial surrender, you’ll have to pay income taxes on any funds beyond the amount you paid into your policy. And because you’re likely taking more out with a total surrender than with a partial surrender, the odds are higher that you’ll have to pay more in taxes than you would with a partial surrender.

Pros and cons of a total surrender of your life insurance policy

Pros:

• It provides access to the policy’s entire available cash surrender value.
• It eliminates the need to pay future premiums.

Cons:

• It ends your life insurance coverage permanently.
• Your beneficiaries will no longer receive a death benefit.
• Depending on the policy and timing, surrender charges and taxes may reduce the amount you receive.
• If you’re in poor health or if your health changes, you may not be able to get new coverage or a new policy.
• Because permanent life insurance is designed as a long-term financial planning tool, surrendering a policy early may result in less value than expected.

Cash value can provide more than a death benefit

Life insurance is often thought of simply as a way to provide for your loved ones after you’re gone. But permanent life insurance can do more than provide a death benefit. Over time, it can build cash value that may give you additional flexibility to address opportunities, navigate uncertainty, or support long-term financial goals.

That’s why many people view permanent life insurance as both a protection tool and a long-term financial asset. While it isn’t designed to replace investing, saving, or other financial strategies, it may complement them by providing stable value, lifelong protection, and access to money when needs change.

Whether cash value life insurance makes sense for you depends on your goals, budget, time horizon, and overall financial plan. Your Northwestern Mutual financial advisor can help you understand how permanent life insurance may fit alongside your other financial strategies and whether it’s right for your situation.

Dividends are not guaranteed. Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC). Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon surrender, lapse, or the death of the insured. Repayment of loans from policy values upon surrender or lapse can trigger a potentially significant tax liability, and there may be little or no cash value remaining in the policy to pay the tax. The policy will lapse if loans become equal to the cash value while the policy is in force and additional cash payments are not made.

The Northwestern Mutual Life Insurance Company (NM), Milwaukee, WI. Principal Underwriter: Northwestern Mutual Investment Services, LLC (NMIS) (securities), subsidiary of NM, registered investment adviser, broker-dealer, member FINRA and SIPC. Not all Northwestern Mutual representatives are advisors. Only those representatives with “Advisor” in their title or who otherwise disclose their status as an advisor of Northwestern Mutual Wealth Management Company (NMWMC) are credentialed as NMWMC representatives to provide advisory services.

Frequently Asked Questions

What is the cash value of a $100,000 life insurance policy?

There isn’t a set cash value for a $100,000 life insurance policy. The cash value and the death benefit are two different parts of a permanent life insurance policy. A policy with a $100,000 death benefit could have a cash value that ranges from very little in the early years to a substantial amount later, depending on factors such as the type of policy, premium payments, dividends, and how long the policy has been in force.

If you’re wondering how much cash value your policy has accumulated, you can typically find that information on your annual policy statement or by contacting your insurance company.

Can I withdraw cash value from life insurance?

Yes. If you have a permanent life insurance policy that has accumulated cash value, you may be able to access that value during your lifetime. Depending on your policy, you can generally do this through a policy loan, a partial surrender, or a full surrender of the policy.

It’s important to understand that accessing cash value can affect your policy. Loans and withdrawals may reduce the death benefit available to your beneficiaries, and some transactions can have tax consequences. That’s why it’s a good idea to understand the trade-offs before taking money from your policy.

How does cash value life insurance work?

Cash value life insurance is a type of permanent life insurance that combines a death benefit with a cash value component that can grow over time. As you pay premiums, a portion of the money helps fund your life insurance coverage, while another portion contributes to your policy’s cash value.

The cash value grows on a tax-deferred basis and may increase through guaranteed growth, dividends, or other features, depending on the type of policy. Over time, accumulated cash value can provide financial flexibility because it may be accessed through policy loans, withdrawals, or surrenders.

While the death benefit is the main reason for purchasing life insurance, cash value can make permanent life insurance more versatile by providing value during your lifetime as well as protection for your loved ones. Many people use it as one component of a broader financial plan alongside savings and investment accounts.