Life Insurance

How Cash Value Builds in a Life Insurance Policy

Cash-value life insurance, also known as permanent life insurance, includes a death benefit in addition to cash value accumulation. While variable life, whole life, and universal life insurance all have built-in cash value, term life 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

So, how exactly does cash value accumulate in your permanent life insurance policy? The details vary depending on the type of policy you have and each individual life insurance company. Here’s a closer look at how this process typically works.

Key Takeaways

  • Cash value builds up in your permanent life insurance policy when your premiums are split up into three pools: one portion for the death benefit, one portion for the insurer’s costs and profits, and one for the cash value.
  • Cash-value life insurance usually has a level premium, in which money doled out to cash decreases over time, and money paid to insurance increases, in tune with the higher cost of insuring you as you age.
  • With whole life policies, cash accounts are guaranteed to grow based on insurance company calculations; with universal life policies, cash grows in tune with current interest rates.
  • Variable life policies invest in mutual fund-like subaccounts; the growth or decline of the cash value is based on the performance of these subaccounts.
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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.

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 depend on how premium payments are invested.

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. It’s similar to how a home mortgage works: In the early years, you pay mostly interest while in the later years most of your mortgage payment goes toward principal.

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 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.

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

Different Policies Accumulate Cash Value in Different Ways

Cash value accumulation isn’t uniform; instead, it varies depending on the type of policy you have.

  • Whole life policies provide “guaranteed” cash value accounts that grow according to a formula the insurance company determines.
  • Universal life policies accumulate cash value based on current interest rates.
  • 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, can correspond more closely to the level of risk you might assume when investing in the stock market. 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 years old. 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.

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Ten years later, your policy’s cash value has grown to $750,000. As you are 65 years old now, the cost of insuring your life is much 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 greatly simplified example: The 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.

Don’t let cash value that has built up in your policy go to waste; cash value in your policy at your death goes back to the insurance company, not your heirs.

Whole Life Insurance Cash Value Chart

It can be helpful to have a more detailed illustration 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.

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