Cash value in life insurance: What is it and how does it work?

Key takeaways

• Cash value in life insurance can help provide financial flexibility for needs like loans or emergencies.
• Accumulating cash value happens gradually, providing potential for growth as you pay premiums (monthly or annual fees).
• Understanding how cash value works can help you make informed decisions about your financial roadmap.

Life insurance is often associated primarily with its death benefit. However, some types of life insurance also build cash value over time. This cash value can be tapped into during your lifetime, providing a financial resource for various needs, such as emergencies, loans for expenses, or even as part of your retirement income strategy. Let’s explore how cash value in life insurance works, its benefits, and practical examples that can assist you in making informed financial decisions.

What is cash value?

Cash value is a component of permanent life insurance that accumulates money over time. Unlike the death benefit, which is paid out to your beneficiaries upon your death, cash value can be accessed while you are still alive. As you pay your premiums, a portion goes towards your policy's cash value, allowing it to grow.

Here’s a simple breakdown of different aspects of a permanent life insurance policy:

• Death benefit: The amount paid to your beneficiaries when you die, providing long-term financial protection.
• Premiums: The recurring payments made to maintain the policy, part of which contributes to cash value.
• Cash value: Tax-preferred savings component within a permanent life insurance policy.

How does cash value work?

When you pay premiums on a permanent life insurance policy, part of that payment goes toward the cost of insurance, and another portion is set aside to build cash value. This cash value grows over time and may have the potential to grow faster depending on the policy type.

Types of life insurance that accumulate cash value

All permanent life insurance policies come with a cash value component. Sun Life offers three types of permanent policies: whole life, universal life, and participating life insurance.

Benefits of cash value in life insurance

Having cash value in your life insurance can provide various advantages, including:

• Financial flexibility: You can withdraw or borrow against the cash value as needed. This flexibility can help you manage your finances more effectively. For example, if you run into unexpected expenses, you could consider taking a loan against your policy's cash value instead of relying on credit cards or personal loans, which can be more costly.
• Potential for growth: The cash value component may grow over time, adding a financial resource you can utilize during your lifetime. For example, some individuals use their cash value as a source of supplementary income during retirement, while still maintaining their life insurance protection.
• Tax advantages: Generally, the growth in cash value isn’t taxed as long as you keep the money within the policy. This can make it a more cost-effective way to grow your savings.

Accessing the cash value is subject to the terms of your policy and may have tax implications. Be sure to review your policy details and speak with a professional about the potential tax consequences before withdrawing money from your cash value.

Why choose a life insurance policy with cash value?

Cash value in a life insurance policy has the potential to grow significantly in value over your lifetime. Generally, the cash value portion of a life insurance policy grows tax-deferred. That means you don’t pay tax on any growth in the cash value, unless you access it during the life of the policy.

The death benefit of a policy is a one-time, tax-free benefit payable to a beneficiary or beneficiaries that you have named. In some policies, the cash value may be part of this death benefit.

How to access cash value

There are different options to access cash value in a life insurance policy. It depends on the type of policy you own. The most common options are borrowing against cash value and taking a cash withdrawal.

How much does life insurance with cash value cost?

The cost varies from person to person. The premiums you pay for your life insurance coverage depend on your:

• choice of policy,
• age,
• assigned sex at birth,
• health,
• medical history, 
• smoking status, and
• lifestyle habits when you purchase life insurance. 

Here’s an example of the cost for a non-participating, permanent life insurance policy with some embedded cash value. Premiums for $100,000 of coverage would be:

• $71 per month for a healthy 30-year-old male, non-smoker,* and
• $64 per month for a healthy 30-year-old female, non-smoker.*

* These premium amounts may change.

Try our Life Insurance Calculator to see how much life insurance you might need to help protect the people you love.

View estimated rates for life insurance based on your age

Things to consider with cash value in a life insurance policy

While cash value in a life insurance policy presents numerous benefits, there are also important considerations you should be aware of, such as:

• Cost of premiums: Permanent life insurance lasts throughout an insured person’s lifetime. This means permanent policies typically have higher premiums than term life insurance. So, it's important to assess if you can fit these costs into your budget. Try our budget calculator to help manage your spending and understand if you're falling short, breaking even or coming out ahead. 
• Impact on death benefit: If you take loans or withdrawals from the cash value, these amounts may reduce the death benefit that your beneficiaries receive.
• Surrender charges: If you cancel the policy early, you may face surrender charges that could eat into your cash value.

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, or taxation advice. Please seek such advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.