Father and kids looking at life insurance on laptop

How Cash Value Life Insurance Works

Updated December 4, 2020 . AmFam Team

Learn about what cash value in life insurance is, how it works and the difference between cash value vs. face amount from American Family Insurance Life Insurance Company.

You most likely purchased life insurance for the financial protection it provides your loved ones in the event of your death — but there can be some additional benefits to life insurance. Some life insurance policies, such as DreamSecure Whole Life Insurance offers the opportunity to build “cash value,” otherwise known as a living benefit.

That living benefit is the value in your policy that may be borrowed against or paid out if the policy is surrendered before death.* Let’s take a closer look at how cash value in life insurance works.

What Is Cash Value in Life Insurance?

Cash value is typically a feature of whole and universal life insurance policies. The policy’s cash value grows over time and can earn interest — and you may be able to borrow against it if the need arises. Note that you will be charged for doing so. If you were to pass away with outstanding loans, your death benefit will be reduced accordingly.

The cash value in your life insurance policy grows on a tax-deferred basis. That means you don’t have to pay taxes on that growth while the cash value remains in your policy, but you might have to pay income tax if you withdraw the cash value.**

Here’s a list of American Family Life Insurance Company policies that can gain cash value:

How to Withdraw Cash Value

Did you know that you can withdraw cash from a whole or universal life policy? You can tap into your cash value from a life insurance policy for any purpose.

Taking out a loan

When you’ve built up enough cash value, you could take out a loan against your whole life or universal life policy.* People might choose to borrow against their policy to help with things like college tuition, a down payment on a home, emergencies or other life-changing events.

Keep in mind, if you borrow against your policy, any unpaid loan and interest is subtracted from the proceeds at the time of death or from the cash value if surrendered. If the loan and interest due becomes too large over time, there is a risk that the balance due could force the policy to end.


Universal, life policies may allow you to withdraw an amount less than the surrender value of the policy.* This is sometimes called a partial surrender. Some companies charge surrender fees and taking a withdrawal could have additional consequences for your policy. Be sure to look at your policy before deciding to take a withdrawal.

Surrendering your contract

If you cancel your life policy, you’ll receive the accrued surrender value and can use the cash any way you want. Going this route means you may be charged surrender fees, which could reduce your cash value. And, if you surrender your whole life or universal life policy, the earnings could be subject to income tax.

What Happens When You Surrender Your Life Policy?

Another important thing to note is when you surrender your life policy, you may get the cash you need when you need it, but you’ll no longer have the death benefit, which is the amount your beneficiaries would receive upon your death.

Trying to replace that death benefit later by getting coverage again could be more expensive down the road. And health changes could mean you wouldn’t qualify for a new policy, so be sure to talk with your insurance agent about the consequences of surrendering your life insurance policy.

Face Amount Vs. Cash Value in Life Insurance

You may have heard of the term “face amount” of life insurance, but don’t confuse this term with cash value. The face amount of life insurance is actually just another term for the coverage amount purchased. The death benefit is the amount that a named beneficiary receives upon the death of the insured.

The death benefit could be more or less than the face amount (depending on things like outstanding loans on cash value or nonguaranteed dividends). The cash value is an entirely separate benefit within the same policy.

In fact, the cost for a cash value life insurance policy is actually more expensive than a term life policy because part of the premium goes toward paying for the death benefit, while a portion goes toward the cash value growth. Check out our life insurance glossary of terms to better understand life insurance terms and definitions.

Get Protected With Life Insurance

There’s no time like the present. Act today to help protect your loved one’s tomorrows. Learn about why you may need a life insurance policy and the various types available at through American Family Life Insurance Company today.

Need more info? An American Family Insurance agent (Opens in a new tab) is happy to answer any of your questions.

This is a brief description of coverage and is subject to policy and/or rider terms and conditions which may vary by state. Fixed and guaranteed premiums are statements about the policy as determined at issue, and any changes made to a policy may affect the premium and are subject to our underwriting rules. The words lifetime, lifelong and permanent are subject to policy terms and conditions. DreamSecure Whole Life and Flexible Life Insurance policies mature at age 121. Please check with an American Family agent for details on coverages and restrictions.

*Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim or from the cash value if surrendered. If the loan balance grows too large for the cash value to support it, the policy could terminate. 

**Neither American Family Life Insurance Company nor its agents are authorized to give tax or legal advice, and this should not be construed as such advice. Customers should consult a tax advisor for answers to tax questions.

Policy Forms: ICC17-225 WL, L-225 (ND) WL, L-225 WL, ICC17-227 WL, L-227 (ND) WL, L-227 WL, ICC17-223 WL, L-223 (ND) WL, L-223 WL, ICC17-224 WL, L-224 (ND) WL, L-224 WL, ICC17-228 WL, L-228 (ND) WL, L-228 WL, ICC21 L141 MS 01 22, L141 ND 02 22, L141 SD 02 22

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