A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent Daniel Walker

UPDATED: Jan 18, 2017

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Don't miss these facts...

  • Cash values are found in permanent life insurance policies
  • You can cash in your policy or use it in a better way
  • People are allowed to take loans against their life insurance, which reduces the death benefit by the amount of the loan

What Is The Cash Value of Life Insurance?


Cash value in a life insurance policy can only be derived from a permanent policy. There are two forms of life insurance, term and permanent. Term life insurance covers an individual with a specific death benefit for a certain period, such as 10, 15, or 20 years, for example.

Permanent life insurance covers and individual until he or she dies, no matter how long the person lives.

Term life insurance either increases in price as a person ages, or it ceases to exist. Permanent life insurance has an every increasing reserve that is built into the policy. This reserve is also called the cash value, and it offsets the increasing mortality charges against the policy as a person ages.

Learn more about getting cash value for your policy below and make sure to use our free comparison tool above to get a free quote today!

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The Cash Value of a Permanent Life Insurance Policy Can Be Utilized

As the years go by and the cash value accumulates in a permanent life insurance policy, it can be borrowed from the policy, or the policy can be surrendered, or cashed in. The amount of the accumulated cash value can be simply turned over to the policy owner if it is cashed in.

Or if the amount is borrowed, interest is charged, and the death benefit is reduced by the amount of cash that is borrowed out of the policy.

Types of Permanent Policies


There are different types of permanent life insurance policies. Here are just a few examples.

–Whole Life

As the name implies, the coverage for the insured is for the “whole of life.” From a mathematical standpoint, this is usually until age 100, when if the person reaches that age, the face amount of the policy is paid to the insured. At that point in time, the cash value of the policy is calculated to equal the face amount or death benefit.

Many whole life policies pay dividends if the policy is participating.

Dividends are refunds of premium overcharges, designed to give space in case mortality requires more reserves. Dividends can buy more paid up insurance, reduce premiums, be paid in cash each year, or left to accumulate at interest.

Universal Life

Universal life is similar to whole life except the policy is built to be more flexible in nature. Whereas whole life has fixed premiums and death benefits, universal life allows the premiums and death benefits to vary as circumstances require.

For example, a policyholder can adjust the premiums and death benefits up or down if needed.

Universal Life has an interest rate that is applied to the cash value each year. The interest rate can vary from year to year, and will also vary from company to company.

Variable Life Insurance

This form of life insurance is similar to the other forms of permanent insurance except for the death benefit, and cash values are tied to equities such and stocks, bonds, and mutual funds. The idea is that the money invested in the equity accounts will get a better return over time.

Equity Indexed Universal Life

This is similar to universal life which pays interest, except in this version the cash value and death benefits are tied to an index such as Standard and Poors. As the index rises so will the cash value and death benefit. However, if the S&P goes down, the indexed values stay the same.

This is a very popular type of policy as when the market is up, you are too, but if it goes down, you stay even. You cannot lose money; you just gain it. Over a period of years, the returns have been very good on the equity indexed policies.

All of These Permanent Life Insurance Policies Have Cash Values


Permanent life insurance will always have the reserve against increasing mortality which translates into the cash value. People are allowed to take loans against their life insurance, which reduces the death benefit by the amount of the loan.

If people keep borrowing their cash value, it might be possible to borrow too much and the policy will lapse. It all depends on how the policy is structured in the first place.

The Taxation of Cash Values Inside of Life Insurance

The inside buildup of cash value in a permanent life insurance policy is not considered to be taxable income. Interest, gains, dividends and other inside gains are not taxed, and they grow on a tax-deferred basis.

As long as the permanent life policy is in force, there is no taxable event.

If, however, the policy is surrendered, the difference between the cash value at surrender and the premiums paid will be considered to be taxable as ordinary income.

If you borrow from your life insurance policy, and the policy remains if force, you do not owe taxes because you are still keeping the policy in effect and paying premiums. This is a good concept to keep in mind, as there is quite a bit of flexibility in this process.

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A Tax-Free Retirement


Some life insurance policies can be structured to accumulate a large amount of cash over a period of years. Participating policies can accumulate high cash values and dividends, and equity indexed policies can accomplish the same goal.

There is a funding limitation placed upon life insurance policies. There is a place in the law that limits life insurance policy funding to the limit where the policy would become a modified endowment contract.

In effect, the policy at that point would almost lose its characteristics of being a life insurance policy because it would be most just cash. Since the cash build up is tax favored, that would be the line at which point the whole accumulation process would stop.

Heavy Funding and Excellent Payouts

A very popular and successful technique for the use of policies with fast and early cash accumulations is to overfund the policy up to the “MEC” or the modified endowment contract limit, say over a period of 10 years, and then take loans from the policy to fund a person’s retirement.

The loans come out of the policy tax-free, as the policy stays in force due to the interest paying the premiums.

Using this method it is possible to fund for 10 years, and then have a 30 year or more payout on a “tax-free” basis. This method takes careful planning and experts to calculate the amount of the funding and the amount of the payout.

In Conclusion

To get back to the initial question about whether or not a person can cash in their life insurance before they die, the answer is yes, but there are so many more options that just make a lot more sense.

The secret is to leave the structure of the life insurance contract intact, and then exploit how the structure works to your advantage.

There are so many options, that it would be silly to just cash the policy in when so much more can be done with the types of policies that are available to us today. Ask a knowledgeable life insurance agent or broker who deals in these areas.

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  1. http://www.dfs.ny.gov/consumer/que_top10/que_life_who.htm
  2. http://www.iii.org/article/what-are-different-types-term-life-insurance-policies
  3. http://www.investopedia.com/terms/c/cash-value-life-insurance.asp
  4. http://www.investopedia.com/terms/w/wholelife.asp
  5. http://www.investopedia.com/ask/answers/08/variable-life-insurance.asp
  6. http://www.lifehealthpro.com/2014/11/11/how-to-use-an-iul-as-tax-free-retirement-savings-s