Maximizing Whole Life Insurance Cash Value

What Is Cash Value Life Insurance?

Cash value life insurance is permanent life insurance coverage that includes a savings like component called cash value. Policies built to grow cash value use part of the premium to build a cash reserve that can be accessed during the life of the policyholder. But what types of insurance have cash value? Does whole life insurance have cash value? This article is about how to maximize your whole life insurance with cash value

Types of Cash Value Life Insurance 

There are a few different kinds of life insurance that have cash value.

While there are multiple types of life insurance that claim the benefits of cash value, whole life insurance is the only permanent life insurance product that builds equity. All other permanent cash value life insurance policies are built with a renewable term insurance component, so they cannot ever build equity as the cost of insurance keeps rising and no portion of the policy is ever paid-up (think paid off) but is merely leased on a renewable basis. Whole life insurance cash value continues to build throughout your life, which is a living benefit of the policy you can use while you’re alive. If whole life insurance is new to you, you may want to read more about how it works here.

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Why Whole Life Insurance Is Ideal for Cash Value

Before whole life insurance existed, life insurance was something that was purchased on a yearly, monthly or even a weekly basis.  An option to continually renew insurance coverage was guaranteed by the insurance company without the requirement of the insured having to undergo more underwriting. All that was required to renew the contract was to pay a higher premium payment to cover the increasing risk that the insurance company might have to pay a death benefit as the insured aged.

Whole life insurance eliminated the need for ever-increasing premium payments by establishing a guaranteed fixed premium for the entire life of the insured. It also allowed a person to evaluate when the cash values in the policy would become more than all the premiums that had been paid for the policy up to that time. This made it possible for a person to see when the cost of insurance was overcome by the equity in the policy.

As this new life insurance contract lasted for the entire lifetime of the insured, and not merely for a certain time period of the insured’s life, it was named “whole life” insurance. Whole life insurance became the product known for guarantees, both for increasing death benefits and for the cash value that it developed. For once, actual ownership of the death benefit, not merely more premium payments, was possible when purchasing life insurance coverage.

How to Determine the Cash Value of a Life Insurance Policy

“How long does it take for whole life insurance to build cash value?” The cash value of whole life insurance can accrue slowly or more rapidly depending on policy design but also age and health of the insured. Most of the time we find that policy design is the primary reason for cash value accrual. That said, you can evaluate the factors that influence how much cash value your policy builds and the rate at which it does so.

We’ve also included a table farther along in the article that illustrates the growth of cash value in a whole life insurance policy.

Premium Amount

Your premium amount is the most obvious factor since every benefit of your policy will be in direct relation to your premium amount. Policy size is the biggest factor that will affect your premium amount, but there are also policy riders that can affect premium amount as well as cash value growth. The most critical rider for early policy cash value is the paid-up additions rider (PUA) rider. The more premium monies that can be directed to a PUA rider, the larger the policy cash value will be. But as with all good things, too much PUA rider can be a bad thing and can trigger unnecessary taxes. It is important to balance the amount of PUA rider to have the most cash value without any negative tax consequences.

Death benefit

The more premium payments you make, the fraction of your death benefit that is cash value increases. 


If your policy pays dividends, how you opt to use your dividends can also make a significant difference in how your cash value grows. Choosing to have your dividends buy paid-up additions (PUAs) is the best way to accrue the most cash value.


We discuss this more below, but the riders you choose to add to your policy also can significantly increase how much cash value you gain and the rate of that gain. 

Policy Length

This might sound like an odd factor when discussing Whole Life Insurance. However, even though you are covered for your entire lifetime with Whole Life, there are ways to set up your policy so that you aren’t paying premiums your entire life, such as a paid-up policy or a reduced paid-up option. These options can also affect how your cash value builds. 

Riders and Whole Life Insurance

Insurance riders, added amendments to life insurance contracts, allow the policy owner to segregate premiums paid towards different types of insurance coverage. A life insurance agent can design a whole life policy with paid-up insurance riders and term insurance riders so that the policy will build cash value much faster than if the owner simply paid the base insurance premium. Using these riders can prove quite beneficial as a long-term financial tool because of the favorable tax treatment life insurance proceeds, withdrawals, and policy loans receive under Internal Revenue Code 7702.

Care needs to be exercised when using these riders because in most cases the policy owner will want to avoid any tax ramifications that could result from adding these riders to a whole life policy. Even though cash values can accumulate quickly with certain riders, it may not always be in the policy owner’s best interest to have these riders depending on how the policy owner intends to use their future cash values.

Funding whole life insurance policies with the maximum amount that is affordable and comfortable is a good financial decision for many people. It is also possible to pay extra premiums into an established whole life policy to increase cash value but following the guidelines is critical when adding additional premium monies so that the policy proceeds will not lose their tax-preferred treatment.

An Example of Cash Value Life Insurance Policy

Here is an example of a basic whole life insurance policy, without riders but with dividends, of a 30-year-old man with a base death benefit of 1,064,553 and a yearly premium of $10,000.

Year (age) Total Premium + Riders Cash Value Death Benefit
1 (31) 10,000  106 1.064,553
10 (40) 100,000 85,881 1,073,109
20 (50) 200,000 235,869 1,152,605
30 (60) 300,000 459,976 1,268,247
40 (70) 400,000 790,577 1,432,456
45 (75) 450,000 1,011,550 1,543,551
50 (80) 450,000 1,230,912 1,682,840
60 (90) 450,000 1,797,295 2,087,887

You’ll notice that at age 75 he stops paying premiums and that his death benefit and cash value continue to grow. You can also notice the rate and amount of his cash value growth.

The Advantages of Whole Life Insurance 

Whole life insurance allows someone, over time, to own more and more of their own death benefit! Instead of the insurance company merely promising to pay a death benefit, the owner of the policy actually develops equity or ownership in the policy they purchase. This ownership or insurance owned by the policy owner is called Paid-Up Insurance and is only available with whole life insurance.

Paid-Up insurance is a specific amount of death benefit that a policy owner has paid for entirely. There will never be another premium charged for that piece of insurance again, never! In other words, paid-up insurance is equity owned by the policy owner. Paid-up insurance can be favorably compared to the equity that someone develops while purchasing real estate or any other asset. Consequently, as with any other asset where equity develops, the policy owner can leverage that equity (money) on demand.

Taxes and Whole Life Insurance Cash Value

In addition to the other benefits, any cash value accrued over the length of a Whole Life Insurance policy is tax-deferred. This allows greater benefit and flexibility for the policy owner over the lifespan of their coverage. Money accessed via a loan against the cash value of a Whole Life Insurance policy can be kept tax free if the policyowner knows how to manage their policy correctly. Cash withdrawn is tax free up to but not exceeding policy cost-basis. Borrowing money against your policy tax-free and without penalties can be of tremendous benefit in many situations. Here are some examples about how to use cash value and information that is useful to know about whole life insurance cash value.

Why a Fixed Premium Is So Important

When a premium is fixed, the premium cannot increase over the lifetime of the insured. This creates a significant advantage for those who purchase whole life insurance. Once the cash values rise to the point of being greater than the premiums paid for the policy, the policy owner can easily determine the value of keeping the policy by seeing how significant each annual cash value increase is compared to the annual premium required. This annual return on premiums paid becomes huge over the lifetime of a whole life insurance contract.

Government Involvement in Whole Life Insurance

In the late 1980s, Congress passed some laws limiting how quickly paid-up life insurance could be purchased and still be classified as life insurance for tax purposes. Similar to paying off a house faster than the amortization schedule, some people were purchasing large amounts of paid-up insurance to make the cash values grow faster. Congress took action to limit ownership of paid-up insurance by setting requirements for how much paid-up insurance could be purchased in a single whole life policy.

These regulations are now defined in what is called the 7-pay period, which broadly states that a life insurance policy can’t accept more in premiums than what it would take to pay off the entire policy, in any 7-year period of time. If the policy does, then it will face taxation both on the growth and the use of its cash value. These laws changed how quickly people could acquire paid-up insurance.

However, it is still possible and feasible to design a whole life policy to build cash values more quickly than a typical whole life insurance policy. Similar to making extra payments on other asset purchases, one can still purchase paid-up insurance and build equity in a whole life policy.

Whole Life as an Estate Planning Tool

Whole Life insurance is a powerful estate planning tool. It lets any policy owner pass money on to a person, corporation, or charity completely tax-free in many cases even if the policy has been overfunded and lost its tax-preferred treatment under IRC 7702.

The Bottom Line with Any Life Insurance Policy

Any life insurance policy design should be based on the purpose for which the policy is intended to be used. Designing the policy for its intended purpose will dictate what riders are necessary and which riders are not necessary.

All life insurance riders have a cost, you either pay up front or when the options provided by the rider are exercised.

Life insurance agents who thoroughly understand how each rider affects a life insurance policy both now and in the future are better equipped to design a policy with maximum cash value.

As a life insurance buyer, you should never feel compelled to purchase any life insurance policy until you fully understand why and how it was designed to benefit your needs. If you don’t fully understand, don’t buy yet. If the agent you are working with can’t help you understand or give you clear explanations, find someone who can.

If you are not completely confident about a life insurance proposal you’ve been given, or you are having difficulty evaluating an insurance policy you already own, we recommend getting an independent insurance review. This helps you be sure of the insurance you own and have financial peace of mind. If you need an independent life insurance review, you are welcome to use our complimentary review service, just request a review here.

Where to Go from Here

Your goal should be to pay a premium that is comfortable and affordable for you. And most importantly, you want to make sure that what you are expecting from your policy will be there for you in the future.

At Life Benefits, we specialize in designing Whole Life Insurance Policies that maximize cash value and meet the needs of people who want to grow their wealth. We believe everyone deserves the chance to be wealthy and have financial peace of mind.

If you have questions about a policy or need a policy designed for you, please contact us via email: [email protected] or by phone 702-660-7000 It would be our pleasure to help you.

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