How Cash Value Grows in a Universal Life Insurance Policy
How Cash Value Grows in a Universal Life Insurance Policy — and What Happens When You Withdraw It
Understanding the Cash Value in Universal Life Insurance
One of the biggest advantages of a Universal Life Insurance (UL) policy is its built-in cash value account.
It’s more than just a death benefit — it’s a financial tool that can grow over time, giving you flexibility and options throughout your life.
But how exactly does the cash value grow? And what happens if you take money out of it?
Let’s break it down simply.
How the Cash Value Grows
Every time you make a premium payment, part of that payment goes toward:
The cost of insurance — what it takes to keep your death benefit in force.
Policy expenses and fees.
Your cash value account.
The money that goes into your cash value earns interest at a rate set by your insurance company (often tied to current market rates but with a guaranteed minimum).
Over time, this cash value compounds tax-deferred — meaning you don’t pay taxes on the growth as long as it stays in the policy.
Think of it like a savings account within your life insurance — one that grows with you, quietly building financial strength in the background.
Ways Cash Value Can Grow Faster
Your cash value can grow faster if:
You make premium payments above the minimum required.
Interest rates rise, increasing credited interest to your account.
You keep your policy active long-term, allowing compounding growth to work in your favor.
Accessing the Cash Value — Withdrawals and Loans
Universal Life gives you flexibility to use your cash value during your lifetime.
There are two main ways to access it:
1. Withdrawals
You can withdraw part of your cash value — typically up to the amount you’ve paid in premiums — tax-free.
However, withdrawals reduce your policy’s death benefit dollar-for-dollar.
For example, if your policy’s death benefit is $500,000 and you withdraw $50,000, your new death benefit becomes $450,000.
2. Policy Loans
You can also borrow against your cash value instead of withdrawing it.
This means you’re taking a loan secured by your policy, and the insurer charges a modest interest rate.
You don’t have to repay the loan — but any outstanding balance will reduce your death benefit when you pass away.
Example: If you borrow $30,000 and never repay it, your beneficiaries will receive your death benefit minus $30,000 plus any interest owed.
How Withdrawals Affect Your Policy
Withdrawal: Reduces death benefit, Tax-free up to your cost basis, Permanent reduction in coverage Loan Death benefit reduced by balance + interest, No immediate tax, Can restore full benefit if repaid Full Surrender Ends your policy, Cash value above premiums taxed, May have surrender charges
Why People Use the Cash Value
Policyholders often access their cash value to:
Supplement retirement income.
Pay for unexpected expenses or opportunities.
Cover future premiums.
Fund business or family goals.
The flexibility makes Universal Life attractive to people who want coverage that adapts to life’s changes.
In Simple Terms
Universal Life Insurance gives you two values in one policy:
A death benefit that protects your loved ones.
A cash value that grows, earns interest, and gives you living financial options.
When managed wisely, it’s one of the most versatile and lasting financial tools available.
