What Is Cash Value Life Insurance?

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what is cash value life insurance

Do you want to have an insurance policy that will cover you for the rest of your life? Then cash value life insurance is perfect for you! Not only does it offer lifelong coverage, but it is also combined with an investment account and provides a death benefit to your loved ones when you pass away. It is always better to start securing your financial future earlier than later, so let compound interest and time work their magic in your favor! 

How does cash value life insurance work?

Premiums are paid on a monthly basis. The money is split into three categories: cost of insurance, fees, and cash value. The cash value money can be cashed out by the policyholder as long as the goal isn’t to leave a death benefit. 

Which type of life insurance typically has a cash value?

Cash value policies have a few different life insurance options, including whole, universal, indexed universal, and variable. 

  • Whole life builds the cash value at a predetermined fixed rate. 
  • Universal fluctuates in accordance with the market’s interest rates. 
  • Indexed universal performs alongside the S&P 500.
  • Variable life is basically the same as mutual funds.

How is the cash value of a life insurance policy calculated?

The cash value is calculated by subtracting depreciation from the replacement cost. This number will always change with time. The cash value amount will also increase with the premiums that you’ll pay on a regular basis.

How long does it take to build cash value on life insurance?

Whole life and universal provide cash value the day you pay your first premium. Indexed and variable cash value life insurance takes time, as there can be a few decades of wait time before decent cash value is accrued. 

Can I withdraw cash value from life insurance?

Yes, you can withdraw the cash value from your life insurance policy. If you don’t want to do that, then you can always get a MoneyLion Credit Builder loan for an instant influx of cash while you wait to build your cash value through life insurance. You can even take a loan out against your own policy. 

Is cash value life insurance tax-free?

Is there a penalty for cashing out life insurance? The answer is that it depends. If your payout is higher than the premiums you’ve put towards your policy, then you might owe income tax on your life insurance policy. But regardless, any interest that you have earned on the cash value of your insurance policy must be reported to the IRS.

What happens to the cash value when you die?

The beneficiaries will receive the death benefit after you die. Anything leftover in the cash value outside of the death benefit will be dispersed to your insurance company.

Example of cash value insurance

Billy has a policy with a $30,000 death benefit and a cash value of $4,000. Billy dies of a heart attack without touching his policy. His beneficiaries receive the $30,000 death benefit to help pay for the funeral. The $4,000 cash value is returned to the insurance company. 

The insurance company technically only has a liability of $26,000 that they will be required to payout. This value is calculated by taking the original death benefit of $30,000 and subtracting the cash value of $4,000 which equals $26,000. 

According to the IRS, the $30,000 death benefit that the beneficiaries would receive does not have to be reported on a tax return as it is not considered gross income. However, any interest that is received or earned will need to be reported to the IRS.

Things to consider with cash value life insurance

Before purchasing a cash value life insurance policy, please consider some of the following factors. 

Death Benefit

Ask yourself, “Do I want to provide a death benefit to my beneficiaries for my funeral? Do I even want a funeral?” You can always contribute monthly amounts to an IRA that could be specifically used for a funeral. But remember, death benefit proceeds do not need to be reported as income, so there is a major value to a death benefit.

Interest Rate

The cash value is most likely on a fixed returned rate. Ask yourself, “Do I want to take a risk and potentially earn more by investing this money by myself?” But then again, what happens if the market stops performing well and this guaranteed return is better than what you could get on your own? These are important scenarios to consider. 


Figure out if you want to lock yourself into a situation where you have to contribute a certain amount of money to your life insurance policy every month for the foreseeable future. If you decide to stop contributing to your insurance policy, you might face adverse repercussions, so make sure you are ready to commit to monthly payments. 


It can take decades to actually build up a decent cash value via an insurance policy. You’ll want to think about whether or not the investment of time is something you can afford. Think about if it makes sense to buy cash value insurance or if you would be better off purchasing term life insurance at your age. 

Advantages of cash value life insurance

Death benefits are intended to help families pay for the funerals of their deceased loved ones. This is beneficial because funerals are generally really expensive. A death benefit is a thoughtful way to save your loved ones around $20,000.

If you are unable to make a payment to your cash value life insurance, you can use money in your cash value life insurance account to pay your premiums. This cash value may be used for emergencies if you have yet to build up you financial safety net.

Disadvantages of cash value life insurance

There are high fees and premiums associated with cash value life insurance policies. You can usually earn a better return on investment by investing in the stock market than agreeing to the fixed rate of a cash value life insurance policy. 

Cash surrender value vs death benefit

Life insurance cash surrender value is the amount of money offered to the policyholder when they request to cancel their policy. Death benefits don’t have to be reported on a tax return whereas surrender value is considered taxable income.

Expanding your financial assets with MoneyLion

Death benefits, premiums, surrender value, and fixed rates are only some of the many elements to think about when considering a cash value life insurance policy. Cash-value life insurance policies are a fantastic tool as long as they are well suited for your financial situation. 

If you’re interested in exploring various investment options like our effortless $1/month investment accounts. From aggressive to conservative investing, you can create a portfolio based on your comfort zone with as little as $5! Check out MoneyLion for more information about investment accounts and opportunities that can help you build a financial safety net!

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