When you invest in a permanent life insurance, you also apply for a cash value account along with a death benefit. While the various permanent life insurances including variable, whole, and universal insurance all have built-in cash value, term life doesn’t. Term life only provides a death benefit.

In this article, we will provide you with the details you will need to know about how to calculate cash value of life insurance?

Once you have managed to collect a good amount of cash value that will allow you to coast through your insurance policy, then you can use these funds to:

  • Pay your policy’s premium
  • Take out a loan at a lower rate compared to what banks have to offer.
  • You can create an investment portfolio that maintains and collects your wealth
  • You can use these funds as supplement income.

So, now the main point is the accumulation of cash value in your permanent life insurance policy. The points vary depending on the type of policy you have and each person’s life insurance company as well.

Listed below is the process of calculating your insurance cash value:

  • Your premium payments are divided:

When you pay your premium on a life insurance policy that also includes cash value, then one portion of the policy goes towards the policy’s death benefit-this is based on your age, health, and other factors. The second half will cover the operating costs and the profits too. The remaining funds will ultimately go towards your insurance cash value. As you continue to pay the premium over the years you will earn interest as well, all this put together will go into your cash value account and eventually increase.

  • Accumulation of funds slows over time:

When you invest in a cash value account through your life insurance policy, you pay a level premium. In the initial years of your policy, a higher portion of the fund is transferred to your cash value account. As time goes by and as your policy gets older, the portion that is allotted to your cash value begins to decrease. It kind of resembles a home mortgage. Each year as you grow older, the cost of insuring your life gets expensive for the company because the older you are the costlier it is to purchase a life insurance.

Generally, the cash value can grow quickly in the initial years of the policy. Then, as the policy gets older the accumulation of wealth officially changes pace and slows down and more premium is applied to the cost of the insurance rather than cash value.

  • Various policies collect cash value in various ways:

Whole life policies: these policies provide an indefinite guarantee cash value accounts that will grow according to a formula that the insurance company will determine.

Universal life insurance policies: Here, the policy accumulated the policy based on current rates.

Variable life policies: this policy invests the funds in something known as sub accounts, which operate like mutual funds. The cash value of your account rises and falls based on how your sub accounts perform.

A Step-By-Step Guide to the Growth of Cash Value:

Let’s start with an example, shall we?

Let’s say that you have bought a whole life policy that has a million dollar death benefit, which you bought when you were just 25 years old. So, you consistently pay the premium every month without fail, and from that, a portion is transferred to the cash value account of your policy.

Now, thirty years later after first purchasing the policy, you’re now 55 years old and your cash value account has grown to a massive 500,000 dollars. Now, because this policy initially offered you 1 million dollars in death benefit funds, you have already managed to collect 500,000 dollars’ worth of funds in your cash value, the insurance cost will have to cover the remaining 500,000 dollars.

Now we jump ten years forward, and your cash value has increased to 750,000 dollars. You are 65 years old now, the cost of insuring your life is more expensive. But, when you take into consideration the cash value, the policy is only ensuring 250,000 dollars. The rest of the funding for the death benefit will come from the cash value amount.

So what we have learned from this simplified example is that the numbers will vary depending on the life insurance company, the type of policy that you buy and the current interest rates.


The bottom line is, that before you get all excited by looking at the numbers, make sure you know what you’re doing and consult an insurance advisor, who will help and guide you through the required procedures.

By Genaro Martin

Linda Martin: Linda, a renowned management consultant, offers strategies for leadership, team building, and performance management in her blog.