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The life insurance company will absorb the cash value and your beneficiary will be paid the policy's death benefit.

However, there is an exception. The beneficiary receives both the cash value and the face value if you purchased a policy rider that calls for that. Review your policy to see what the coverage entails. The rider would have caused a higher premium. 

Cash value is only available in permanent life policies, such as whole life. Cash value policies build value as you pay your premiums.

Key Takeaways

  • Insurer will absorb the cash value of your whole life insurance policy after you die, and your beneficiary will get the death benefit.
  • You can borrow or withdraw money from your life insurance policy. You can also use the money to pay for your premiums.
  • If you borrow money from the cash value of your whole life insurance, then you have to pay interest when you repay the loan.
  • You will have to wait until the cash value account has gathered enough value to be paid up.

You can borrow against the cash value or withdraw money. You can also use cash value to pay your premiums. However, you have to wait until the cash account has accumulated enough value; the policy then is known as being "paid up."

If you borrow from 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, the insurer will deduct the money from the death benefit. In some cases, more than the amount of the withdrawal 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 beneficiary. Also, any non-loan withdrawals will get taxed at your ordinary income tax rate.

You have to be careful not to decimate the death benefit or put yourself into a bad tax situation by tapping into the cash value too much. However, you may not want to accumulate cash value and not ever use it. 

Maintaining the cash value when you're younger is a good idea. The cash account serves as a financial resource in case something comes up and you need to tap into the money. 

But if you're older and sitting on a large amount of cash value you'll never need, consider asking the life insurance company for a higher face value in exchange for the cash value. That way, your beneficiary will collect a larger death benefit and the cash value won't go to waste. Talk to your life insurance agent or call the life insurance company's customer service department directly for details.

For more information, see Cash value life insurance: What's it worth to you?.