What Is Cash Value in Life Insurance?

Cash Value, Explained

Cash value is the money that builds up inside a permanent life insurance policy over time. It is a “living benefit,” which means you can use it while you are still alive.

Only permanent policies build cash value. Whole life and universal life insurance have it. Term life insurance does not, because it is only meant to last a set number of years.

Here is the simplest way to think about it. Part of each premium you pay goes toward the cost of insurance. A smaller part goes into a separate account that grows over time.

That account is your cash value. It is a bit like a savings account attached to your policy, and the money in it usually earns interest.

The cash value belongs to the policy owner — the person who controls the policy. Only that person can access it or make changes.

One key point sets cash value apart from the death benefit. The death benefit is paid to your loved ones after you pass away. The cash value is something you can reach while you are alive.

This feature shows up in burial insurance too. Since most burial insurance, funeral insurance, and final expense policies are built on whole life insurance, they build cash value the same way.

How Cash Value Accumulates Over Time

Cash value does not appear right away. It builds slowly, and the early years are the slowest.

With most whole life burial insurance policies, there is little to no cash value during the first couple of years. This is true no matter which company you buy from.

After that, the account starts to grow. A small slice of each premium payment is added, and the balance earns interest along the way.

Three main things affect how fast your cash value grows: how much you pay in premiums, how long the policy has been active, and the size of your death benefit.

In a whole life policy, this growth is steady and predictable. When your policy is issued, you receive a table of guaranteed values. It shows the exact cash value for each year the policy is in force.

Growth is also tax-deferred. That means you do not pay taxes on the cash value as it builds inside the policy.

Here is a real-world example to show the pace. A 50-year-old man buys a $25,000 whole life policy for about $75 a month. After ten years, his cash value would be roughly $3,500.

The main thing to remember is patience. Cash value is designed to grow over the long run, not overnight.

Cash Value vs Death Benefit: Two Different Numbers

It is easy to mix up cash value and the death benefit, but they are two separate things. Knowing the difference matters for anyone shopping for burial insurance.

The death benefit is the amount your loved ones receive when you pass away. On a $10,000 funeral insurance policy, the death benefit is $10,000.

The cash value is the smaller savings balance that builds up inside the policy while you are alive. It is almost always less than the death benefit.

Think of it this way. The death benefit is money for your family later. The cash value is money you can reach now.

These two numbers do not add together. When you pass away, your loved ones receive the death benefit — not the death benefit plus the cash value.

The two numbers are also connected. If you borrow from your cash value and do not pay it back, the insurance company subtracts the unpaid amount from the death benefit.

Here is a simple comparison for a $10,000 final expense policy.

The main takeaway is that the death benefit is the reason to buy the policy. The cash value is a helpful extra.

How Policy Loans Work

One way to use your cash value is to take a policy loan. This lets you borrow money using the cash value as backing.

You can borrow some or all of the cash value and spend it however you want. There are no rules on how you use the money.

A policy loan is simple to get. Because you are borrowing against your own policy, there is no credit check and no application to fill out.

There is also no fixed payback schedule. You can repay the loan in one lump sum, in small payments, or on your own timeline.

But there is an important trade-off to understand. The loan charges interest, and that interest is added to the balance over time.

If you pass away with a loan still owed, the insurance company subtracts the balance from the death benefit. Here is the example from Choice Mutual: on a $10,000 policy with a $1,000 loan, your loved ones would receive $9,000.

Unpaid loans keep growing because interest keeps adding up. If the loan ever grows larger than the cash value, the policy can lapse and end your coverage.

For burial and funeral insurance, this is worth thinking about carefully. The whole point of the policy is to leave money for final costs, and an unpaid loan shrinks that amount.

Surrendering a Policy: What Surrender Value Means

Surrendering a policy means canceling it. When you do this, the insurance company refunds the cash value that has built up.

The amount you get back is called the cash surrender value. It is your cash value minus any fees the company charges to cancel.

These fees are called surrender charges. They are usually highest in the early years and shrink over time, often disappearing after about ten years.

This is why surrendering early can be costly. In the first year or two, the fees can equal most or all of the cash value, so you might get little or nothing back.

There is a bigger trade-off, though. Once you surrender the policy, your coverage ends. Your loved ones will no longer receive a death benefit.

There can also be a tax bill. If your surrender payout is larger than the total premiums you paid in, the extra amount counts as taxable income.

For most burial insurance, this is rarely a concern. Final expense policies have small cash values, so a surrender payout that beats total premiums paid is uncommon. Still, it is good to know the rule.

Before canceling, it is worth remembering why the policy was purchased. If it is there to cover funeral costs, surrendering removes that protection.

How Cash Value Works in Final Expense Policies

Final expense insurance is built on whole life insurance, so it builds cash value like any other whole life policy. Since burial insurance, funeral insurance, and final expense insurance are the same product, they all work this way.

The growth is slow, and the amounts are small. Because these policies have low coverage — usually $5,000 to $35,000 — the cash value stays modest.

As with any whole life plan, there is little to no cash value in the first couple of years. After that, it grows a bit each year.

One point often confuses buyers, so it is worth clearing up. The waiting period and the cash value are two separate things.

Some burial insurance plans have a two-year waiting period on the death benefit. If you pass away from natural causes during that time, your loved ones get your premiums back plus a little interest, not the full amount.

That waiting period affects the death benefit. It does not stop the cash value from slowly building in the background.

Your cash value in a final expense policy can be used the same ways as any whole life policy: a loan, a surrender refund, or to keep the policy going if you miss a payment.

Here is the honest truth about cash value in these plans. It is a nice bonus, not the reason to buy. People buy funeral insurance because it is guaranteed to last their whole life at a fixed price.

Common Cash Value Misconceptions

Cash value is often misunderstood. Clearing up a few myths can help you make a better decision about burial insurance.

Myth 1: Cash value is paid on top of the death benefit. It is not. When you pass away, your loved ones receive the death benefit, not the death benefit plus the cash value.

Myth 2: You build cash value right away. In most whole life burial policies, there is little to no cash value during the first two years. It takes time to grow.

Myth 3: A policy loan is free money. A loan charges interest, and any unpaid balance is subtracted from the death benefit. Left unpaid long enough, a loan can even cause the policy to lapse.

Myth 4: Cash value is always tax-free. Growth inside the policy is tax-deferred, and loans are usually tax-free while the policy stays active. But if you surrender the policy for more than you paid in premiums, the extra can be taxed.

Myth 5: The waiting period and cash value are the same thing. They are different. The waiting period affects when the full death benefit is paid. Cash value is a separate savings feature.

Myth 6: You should buy final expense insurance for the cash value. Final expense cash value is small and slow. The real reason to buy is permanent, guaranteed coverage at a fixed price.

The clearest way to think about cash value is as a helpful extra. It is real and useful, but it is not the heart of what a burial insurance policy does.