What happens to the cash value of my whole life insurance policy when I die?

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If you pass away with a cash value life insurance policy, your beneficiaries will get the death benefit, but the insurer keeps the cash value. Your beneficiaries will not get any of the cash value, because the policyholder can only use the cash value of a life insurance policy while they are alive.

Although the cash value is not paid out to beneficiaries, some life insurance policies allow you to increase the death benefit as you grow the cash value.

Cash value life insurance can be complicated, and it is important to consult a financial advisor before incorporating it into your financial plan.

Key Takeaways

When you die with a cash value life insurance policy, the insurer keeps the cash value, and your beneficiaries receive only the death benefit.
The policyholder can only use the cash value while they are alive.
If you have a paid-up insurance rider, you may be able to grow your policy’s death benefit as you grow the cash value.

How does the cash value work?

The cash value in a permanent life insurance policy acts like a savings component that grows tax-deferred over time.

You can borrow against the cash value, withdraw money, or use it to pay your policy premiums. However, you have to wait until the cash account has accumulated enough value and is paid up, which takes decades.

All of this comes at a cost — if you borrow from the cash value, you have to pay interest if you repay the loan. If you decide not to repay the loan and take the money as a withdrawal, the amount, plus interest, will be deducted from the death benefit. In some cases, more than the withdrawal amount plus interest is deducted, which could wipe out the death benefit.

Any outstanding loans at the time you die will reduce the death benefit for your beneficiaries. Also, any non-loan withdrawals will get taxed at your ordinary-income tax rate.

What happens to a life insurance policy’s cash value after a policyholder dies

When you die, any remaining cash value in your life insurance policy goes back to the life insurance company, even if you didn’t access or use any of it during your lifetime.

However, if you used any of the cash value, your beneficiaries could receive a lower death benefit. For instance, if you took out a loan against the cash value and didn’t repay it, the insurance company will deduct the loan amount, plus interest, from the death benefit.

Before you sign up for a cash value life insurance policy, you should consult a financial advisor about the implications of such a policy on your financial and estate plans.

When can beneficiaries get the cash value of a life insurance policy?

Usually, the cash value can only be used while you, the policyholder, are alive. The cash value remains completely separate from the death benefit and cannot be accessed by your beneficiaries, even when you die.

There is one scenario where beneficiaries can access your policy’s cash value: if you purchased paid-up additional insurance. Paid-up additional insurance is a rider that allows for the death benefit to increase alongside the cash value. This rider is not widely available, so you’ll need to check with your insurer if you have access to this option.

Cash value policies can be a valuable financial planning tool for high-income individuals, but the cash value itself is not passed on to your beneficiaries after you die. If you bought life insurance to provide funds for your family, you’ll want to carefully lay out your financial plan and ensure that your policy’s cash value doesn’t diminish the death benefit.

How does the cash value impact the death benefit?

After the insured dies, a whole life insurance policy usually pays out just as any other life insurance policy does. The beneficiaries file a claim and receive the death benefit to use however they wish.

But if you borrowed against the cash value and never paid it back, that amount will be deducted from the final death benefit amount. Additionally, if you withdrew from the cash value, that amount will also be deducted from the death benefit paid out.

But, if you leave the cash value as is, your policy’s death benefit will remain stable and your beneficiaries will receive the entire lump sum.

How to use the cash value while you’re alive

One of the most common ways to use your cash value is by taking out a loan against the cash value. This allows you to borrow money at relatively low interest rates, using the policy as collateral, without the need to go through traditional lenders. You can use these funds for a variety of needs, such as covering emergency expenses, paying off debt, or even supplementing your retirement income. Any unpaid amount from the loan, including interest, will be deducted from the death benefit when you pass away.

Another option is to make direct withdrawals from the cash value. This can provide you with immediate access to funds, but it’s important to note that withdrawing money can reduce the death benefit. Additionally, you may also have the option to surrender your policy altogether to receive the full cash value, though this will cancel the policy and leave your beneficiaries without a death benefit. Many people also choose to use the accumulated cash value to cover future premium payments, reducing their out-of-pocket costs for maintaining the policy. However, before tapping into your policy’s cash value, it’s important to understand how these actions will impact your long-term coverage and benefits.

Frequently asked questions

Can you lose your policy if you borrow too much?

Yes, if you borrow too much against your policy’s cash value and don’t repay it, the loan balance — including interest — can grow to exceed the cash value. If that happens, the policy could lapse, leaving you without coverage and possibly triggering a tax bill on the gains.

Is cash value the same as surrender value?

Not exactly. Cash value is the total amount your policy has accumulated over time. Surrender value is the amount you’d actually receive if you cancel the policy, which is the cash value minus any surrender fees and outstanding loans.

Can you use cash value to fund retirement?

Yes, some people use cash value as a supplemental income source in retirement. You can access it through loans or withdrawals, often tax-free up to the amount you’ve paid in premiums. However, using it this way may reduce or eliminate your death benefit, so it should be part of a carefully planned strategy.

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Nupur Gambhir

Managing Editor

Nupur Gambhir is an insurance expert and managing editor of Insure.com. She specializes in life and health insurance content, and has experience as a marketing consultant.