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What is cash value in life insurance, and how does it work?
July 30, 2024
By Paul Moser
Did you know that some life insurance policies have a cash value? You may be able to provide protection for your loved ones, and access this money. Learn more about cash value in life insurance and how it works.
22-million Canadians have life insurance coverage, according to the Canadian Life and Health Insurance Association (CLHIA).
I’m one of those Canadians. Over 30 years ago, I bought a life insurance policy. A few years ago, I discovered this policy has a “cash value.”
So what is cash value in a life insurance policy? Cash value is the associated value of the life policy that may grow over time. Depending on the type of policy you choose, this cash value can grow in different ways, such as:
- guaranteed and additional cash values accumulating year after year, or
- policyholder dividends earned in participating insurance policies over time.
In other plans, such as universal life, your policy cash value may grow based on actual investment accounts in the policy.
It’s important to remember that cash value in a life insurance policy isn’t the same as a savings account at a bank. You may be able to withdraw or borrow against the cash value when an urgent need for cash exists. But in that case, there’s an interruption to your policy, your coverage, and the protection for your beneficiaries.
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.
Different life insurance policies that can accumulate cash value
There are three types of life insurance policies that may accumulate cash values that you could access:
- Whole life: a type of permanent life insurance.
- Participating life: also called par insurance. This type of whole life insurance is a contract that offers a chance to earn policyholder dividends.
- Universal life: life insurance that offers flexibility on your death benefit, payments, and the investment savings elements of your policy.
How to access cash value funds
There are different options to access cash value in a life insurance policy. It depends on the type of policy you own.
1. Borrow against the cash value.
You may be able to take a policy loan against some of the cash value in the policy. But you’ll have to pay interest on the loan. These kinds of loans don’t need credit checks or collateral. However, there may be tax consequences.
While you don’t have regular loan payments on the amount you borrow, any loan balance is deducted from the amounts payable to your beneficiary at your death. You can repay the loan or interest charges at any time.
Life insurance companies will allow you to borrow a certain percentage of the cash value. But they won’t let you borrow the whole amount. This is because the loan balance and interest charges reduce the net cash value. Once that value reaches zero, the policy is cancelled, and the life insurance coverage ends. Also, depending on how much you borrow, there may be tax consequences.
2. Take a cash withdrawal.
Depending on how cash values have accumulated in your policy, you may be able to take a cash withdrawal. Again, there may be tax consequences. This may reduce your policy’s death benefit and may affect the future cash value growth. That means there will be less money for your beneficiaries after you die. Cash withdrawals are different than policy loans:
- You can repay a policy loan.
- A cash withdrawal is an amount permanently removed from the policy that can’t be put back.
3. Cancel your policy.
In this option, you end your contract with the insurance company. This means your beneficiaries will no longer receive any benefit at the time of your death. The insurance company will pay you the cash surrender value, if there is any available. Generally, this is the cash value of the policy to date, less any loans, loan interest, premiums outstanding, or surrender fees. Your life insurance coverage ends, and some or all the money you receive may be subject to tax.
Your advisor can help you find the right policy
Not sure what’s right for you? An advisor can explain all your insurance options. They can help you figure out the right products to meet your needs and goals. Don’t have an advisor?
Frequently asked questions
Can I customize my policy to fit my specific needs?
Yes. There’s no “one-size-fits-all” type of life insurance. The kind your parents have, or that your friend just bought, may not be right for you. To help choose the right type of life insurance, consider:
- your personal and family needs,
- the stage of life you’re at, and
- what you can afford.
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, and
- lifestyle habits when you purchase life insurance. For example, are you a non-smoker or smoker?
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.
Use this Calculator to see how much life insurance you might need to help protect the people you love.
