Understanding How Cash Value Builds Up Your Insurance Policy

A policy that accumulates in value during the lifetime of the insured and pays out upon the death of the insured is called cash-value life insurance or permanent life insurance.

Most life insurance policies have built-in cash value, save for term life. Whole life insurance guarantees cash value that grows based on a given formula. Universal life insurance grows cash value based on current interest rates. Variable life insurance grows cash value by investing funds in subaccounts that act like mutual funds, and earnings depend on the performance of these subaccounts.


The good thing about cash-value life insurance is that the earnings on the policy are not taxable, making it a good tax-sheltered investment and a great supplement to retirement income. The disadvantage of cash-value insurance is its higher premium because part of it goes to the death coverage and some to the policy’s cash value.

Once the policy has considerable cash-value accumulated, the insurer may stop paying premium and let the policy earnings pay for the remainder of the premium. For this reason, most life insurance policies have longer terms than the its premium payment period because insurance companies already calculate the remaining five to ten years as paid solely by the accumulated cash value.

In addition, the insurer may take out a loan using the policy funds at a lower borrowing rate than most banks offer. This is because the money borrowed by the insurer is actually his or her to begin with.

Cash value policies offer relatively good earnings because the funds are channeled to an investment portfolio that maintains and builds up wealth. The insurer may not disclose the specifics of the portfolio, but only provides assurance that the policy would earn as much and as low as certain percentages.


Cash-value insurance acts like home mortgage, wherein your installments pay off interests first and then the principal later. During the early years of the cash-value insurance, most of the premium goes to the cash value. As the insured gets older, with the policy nearing maturity, most of the premium shifts to paying off the cost of the coverage.