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When you die, the life insurance company keeps the cash value and only pays out the death benefit to your beneficiaries.

When a person dies, their life insurance company will absorb the cash value and your beneficiaries will be paid the policy’s death benefit. The cash value of a life insurance policy can only be used by the policyholder while they are alive and is not paid out to beneficiaries. However, there are some life insurance policies that 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 you incorporate it into your financial plan.

Key Takeaways

  • Insurers will absorb the cash value of your whole life insurance policy after you die, and your beneficiaries will receive 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.

What happens to the cash value in a whole life policy at death?

When you die, any remaining cash value in your life insurance policy goes back to the life insurance company. This means if you haven’t utilized any funds put into the cash value, you’ve wasted years of premiums.

On the other hand, if you did use the cash value of your policy, it could have repercussions on your beneficiaries’ death benefit. For example, if you took out a loan against your policy’s cash value and did not pay it back, the insurance company will deduct it from the death benefit — with interest. 

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. 

How a whole life insurance policy pays out at death

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, what separates whole life insurance from a term life insurance policy is its cash value component, which can sometimes complicate the death benefit payout. 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 does the cash value work?

While you’re alive, you can borrow against the cash value or withdraw money. You can also use the cash value to pay your 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 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 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 beneficiaries. Also, any non-loan withdrawals will get taxed at your ordinary-income tax rate.

Learn more about cash value life insurance here. 

Do beneficiaries get the cash value and the death benefit?

Most of the time, no — 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 may be able to 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 or not.

Cash value policies can be an important financial planning tool for people with high incomes, but they don’t provide funds for 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 make sure that your policy’s cash value doesn’t diminish the death benefit. 


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Nupur Gambhir
Managing Editor


Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service.

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