Life insurance is not designed as an investment, but some types let you build cash value that you can borrow against or withdraw
Most life insurance — term life — is pure insurance: you pay a premium, and your beneficiaries get a payout if you die. It has no cash value and no investment component. But permanent life insurance (whole life, universal life, and variable universal life) includes a savings account called cash value that grows over time. You can borrow from this cash value, withdraw part of it, or use it to pay premiums, though doing so reduces your death benefit and may trigger taxes.
The catch is that permanent life insurance costs 5 to 15 times more per month than term life for the same death benefit. You are paying for both the insurance and the savings feature. Whether that trade-off makes sense depends on your actual goals — if you want to invest money, a regular investment account usually costs less and gives you more control. If you want life insurance that lasts your whole life and are willing to pay for it, permanent insurance with cash value may fit.
Key Takeaways
- Term life insurance has no cash value and cannot be used as an investment; permanent life insurance (whole life, universal life, variable universal life) builds cash value you can borrow against or withdraw.
- Cash value grows tax-deferred, but you pay much higher premiums for permanent insurance — often 10 times more than term for the same death benefit.
- Borrowing from cash value does not count as income and is not taxed, but it reduces your death benefit and the loan accrues interest.
- Withdrawals from cash value above what you paid in premiums are taxed as ordinary income, and surrendering the policy entirely may trigger a tax bill.
- For most people saving for retirement or other goals, a regular investment account or retirement account (401k, IRA) offers lower costs and better tax treatment than permanent life insurance.
How cash value works in permanent life insurance
When you buy permanent life insurance, part of your premium goes to the insurance company's cost of insuring you, and part goes into a cash value account. This account grows at a rate set by the insurance company — either a fixed rate (whole life), a rate tied to market indexes (indexed universal life), or based on the performance of investment subaccounts you choose (variable universal life).
The cash value grows tax-deferred, meaning you do not pay income tax on the growth each year. This is different from a regular investment account, where you owe tax on dividends and capital gains annually. However, you are paying for this tax advantage through much higher premiums. A 40-year-old buying $500,000 in whole life insurance might pay $400 to $600 per month, while the same death benefit in term life might cost $30 to $50 per month.
The cash value is not yours to use freely. The insurance company owns it until you access it, and accessing it has consequences. If you die while the policy is active, your beneficiaries receive the death benefit, not the cash value plus the death benefit — the cash value is part of how the company funds the payout.
Borrowing against cash value
Once your cash value reaches a certain level (usually after 2 to 5 years), you can borrow from it. The insurance company lends you money at an interest rate stated in your policy — typically 5 to 8 percent, though some policies charge less. You do not have to repay the loan on any schedule; the insurance company straightforward deducts unpaid interest from your death benefit when you die.
A loan from your cash value is not taxed as income, which is one advantage over withdrawing the cash value itself. However, the loan accrues interest, and if you do not repay it, that interest compounds. If the loan and interest grow larger than your cash value, the policy can lapse and you lose the insurance. You also lose the tax-deferred growth on the borrowed amount.
Borrowing makes sense if you need short-term money and want to avoid selling investments or taking a loan from a bank. It does not make sense as a regular source of cash — you are paying interest to access your own money, and you are reducing the death benefit your family will receive.
Withdrawing cash value
You can withdraw cash value directly from your policy without borrowing. Unlike a loan, a withdrawal reduces your cash value permanently and does not accrue interest. However, withdrawals are taxed differently than loans.
Withdrawals are tax-free up to the amount of premiums you have paid into the policy. Any withdrawal above that is taxed as ordinary income in the year you withdraw it. For example, if you paid $50,000 in premiums over 10 years and your cash value is now $75,000, you can withdraw $50,000 tax-free, but a $75,000 withdrawal would trigger a $25,000 taxable gain.
Large withdrawals also reduce your death benefit dollar-for-dollar. If you withdraw $20,000 from your cash value, your death benefit drops by $20,000. Some policies allow you to restore the death benefit by paying additional premiums, but that costs extra money.
Surrendering the policy and tax consequences
If you surrender (cancel) your permanent life insurance policy, you receive the cash value minus any outstanding loans and surrender charges. The insurance company may charge a surrender fee if you cancel within the first 10 to 15 years — this fee can be thousands of dollars and is deducted from your cash value before you receive anything.
Any gain (cash value minus total premiums paid) is taxed as ordinary income when you surrender. If you paid $60,000 in premiums, your cash value is $85,000, and there is a $5,000 surrender charge, you receive $20,000 and owe tax on the $25,000 gain. This tax bill can be substantial and is often a surprise to policyholders.
Surrendering also means you lose the death benefit entirely. If you still need life insurance, you will have to buy a new policy, and your premiums will be higher because you are older.
Permanent life insurance versus regular investing
The main reason to use permanent life insurance as a savings vehicle is if you want life insurance that lasts your entire life and are comfortable paying much higher premiums for it. If your goal is purely to invest money and build wealth, a regular investment account is almost always cheaper and more flexible.
| Feature | Permanent Life Insurance | Regular Investment Account (Brokerage) | Retirement Account (IRA/401k) |
|---|---|---|---|
| Monthly cost for $500k benefit/savings | $400–$600 | $0 (you choose how much to invest) | $0 (you choose how much to invest) |
| Tax-deferred growth | Yes | No (taxed annually) | Yes (or tax-free in Roth) |
| Access to money | Loan or withdrawal (both have costs) | Anytime, no penalty | Before 59½ may trigger penalty |
| Death benefit | Yes | No | No |
| Flexibility to change investments | Limited (depends on policy type) | Complete control | Complete control |
If you need life insurance and also want to save money, you could buy term life insurance (much cheaper) and invest the difference in a regular account or retirement account. Over 20 years, this approach typically builds more wealth than permanent insurance, because you are not paying the high premiums and you have full control over your investments.
Permanent life insurance makes more sense if you have a specific reason to keep insurance your whole life — for example, you own a business and want to fund a buyout agreement, or you have dependents with special needs who will need support indefinitely. In those cases, the higher cost is worth it because you are buying both insurance and certainty.
Common mistakes when using life insurance as an investment
Many people buy permanent life insurance thinking the cash value will grow quickly and provide retirement income, then are disappointed by slow growth and high fees. The cash value growth rate is often 2 to 4 percent per year after fees — lower than historical stock market returns — and you are paying high premiums to get it.
Another mistake is borrowing from cash value repeatedly without repaying the loans. The interest compounds, and if the total debt exceeds your cash value, the policy lapses. You lose the insurance and may owe taxes on the gain, even though you never received the money.
A third mistake is not understanding the tax consequences of withdrawal or surrender. Many people are shocked to learn that cashing out a policy triggers a large tax bill, or that they owe taxes on gains they thought were tax-free.
Frequently Asked Questions
Can I use life insurance cash value for retirement income?
You can, but it is usually not the best way. You would need to borrow from or withdraw from the cash value, both of which have costs and tax consequences. A retirement account like a 401k or IRA is designed for this purpose and offers better tax treatment and lower fees. If you already own permanent life insurance with substantial cash value, it can supplement retirement income, but it should not be your primary retirement strategy.
What happens to cash value if I stop paying premiums?
If you stop paying premiums, the insurance company will use your cash value to pay the premiums automatically — this is called automatic premium loan. Once the cash value runs out, the policy lapses and you lose the insurance. Some policies allow you to surrender and receive the remaining cash value, but you will owe taxes on any gain.
Is cash value in life insurance protected from creditors?
In many states, cash value in life insurance has some creditor protection that regular investment accounts do not have. However, this protection varies by state and by the type of creditor. Consult a lawyer in your state if creditor protection is important to your situation.
Can I use a life insurance loan to pay off debt?
Yes, you can borrow from your cash value and use it for any purpose, including paying off debt. However, you are paying interest on the loan, and the interest compounds if you do not repay it. If you are trying to pay off high-interest debt like credit cards, using a life insurance loan at 5 to 8 percent interest is usually better than credit card rates, but it still costs money and reduces your death benefit.
What is the difference between whole life and universal life for investing?
Whole life has a fixed premium and a may provide minimum cash value growth rate set by the insurance company. Universal life has flexible premiums and variable cash value growth tied to market indexes or your investment choices. Whole life is more predictable but usually costs more. Universal life offers more flexibility but the cash value can grow more slowly if markets perform poorly, and you may need to pay higher premiums to keep the policy active.