What is cash value in life insurance and how can you use it?

A life insurance policy may include more than just a death benefit. Some earn interest, referred to as cash value, that the policyholder can access while they're still alive.  

Typically a feature of permanent life insurance, cash value provides funds you can borrow against or withdraw. Policies with cash value cost more than term life insurance, which rarely accumulates interest. If you want another income stream later, however, the higher premiums may be worth it.

Here's what you need to know about cash value in life insurance. 

Cash value is the portion of a permanent life insurance policy that earns interest and can be accessed during your lifetime to fund retirement, cover premiums, increase a death benefit or for other purposes.

Withdrawals from the cash value of a policy are tax-free, but any cash value growth beyond what you paid in premiums is taxed as income.

In most circumstances, your beneficiaries will not receive any cash value after you die.

Most permanent life insurance policies have a cash value portion.

• Whole life insurance 
• Universal life insurance, including indexed universal and guaranteed universal life insurance 
• Variable life insurance 

MassMutual is CNBC Select's top pick for whole life insurance. It offers a variety of policies and insurance riders and has received the highest possible rankings for financial strength from AM Best. In addition, MassMutual has paid dividends to eligible policyholders every year since 1869, increasing their cash value.

We selected Pacific Life as the best for universal life insurance. With a range of specialized policies and customizable riders, it has received high customer satisfaction ratings from JD Power. Term policies from Pacific Life can be converted to permanent life policies without a medical exam.

Cash value typically doesn't accrue for the first two to five years of a policy's term. It can take decades for it to accumulate into a significant amount.

Exactly how quickly the cash value grows depends on the type of policy.

Different types of insurance accumulate, earn interest and, in some cases, invest the cash value differently and come with different levels of risk.  

• Whole life insurance: Cash value grows at a fixed rate set by the insurer. 
• Universal life insurance: Cash value grows based on interest rates and investments.  
• Variable life insurance: Cash value can be invested in portfolios that function like mutual funds and fluctuate with the performance of these accounts.  

Cash value that grows at a fixed rate is the least risky option, while variable life insurance policies have the most potential to lose money.

You can use the cash value in your life insurance policy in various ways.

• Pay premiums: For variable and universal life insurance policies, you may be able to pay your premiums with the cash value in the policy. This can be helpful when you enter retirement and have less income. Whole life policies don't allow you to pay premiums with cash value in many situations. 
• Take a loan from your insurer. Cash value can be taken out as a loan, usually with a lower interest rate than a home equity or personal loan. However, since unpaid life insurance loans can reduce your policy's death benefit (or even cause your policy to lapse), you might want to discuss it with a financial advisor.  
• Increase the death benefit on your policy. You may be able to add to your death benefit with your cash value on some policies.  
• Withdraw money from your cash value. It's possible to withdraw money from your cash value like a savings account. If the withdrawal amount is less than what you've paid in premiums, it's not taxed. However, making withdrawals could lower the value of your death benefit.  

If you're considering using some of your life insurance's cash value, consult your insurance agent or a financial professional to understand what options are available and how it could affect your policy and benefits.  

If you have a permanent life insurance policy, cash value can be used as a source of income or collateral for a loan. You can also use it to pay premiums or increase your death benefit.

Understanding the cash value of your policy can be complicated, so consult with your insurance agent or a financial advisor.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every life insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best life insurance.

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