how to use whole life cash value

How to Use Whole Life Cash Value

Permanent life insurance products often build cash surrender value, and this is commonly simplified to “cash value.” Treatment of cash value varies from product to product, company to company, and from agent to agent. Whole life policies are highly customizable, and therefore the whole life cash value is also highly variable.

I will show how you can use whole life cash value to buy investments and tackle your debts. In doing this, we will also explore how cash value builds, how it is accessed, and how to think about this process so you maximize your long-term independence from traditional banks.

Before reading this article, I strongly recommend that you read Becoming Your Own Banker, by R. Nelson Nash. It may also help to read my last article, which highlights some of they key terminology used in whole life insurance.



We will be discussing a fictional policy on a fictional person. For the purposes of illustrating concepts only, I will be using round numbers where possible. The only way to get actual pricing of life insurance products is to get a quote through a life insurance company or agent.

Additionally, will be discussing the use of dividends from a mutual life insurance company. Dividends are not guaranteed.  Dividends are based on the actual performance of a company from year to year, and so life insurance illustrations are never an accurate portrayal of the future. When declared, dividend payments will almost certainly be higher or lower than shown. I have taken every effort in my hypothetical calculations to understate the current performance of the cash value in these policies. The following is shown with no suggestion of accuracy whatsoever, and should not be used, under any circumstances, to make a decision about the purchase of life insurance or any other product.

Your budget will be higher or lower than the numbers shown. This strategy may be employed by people with very modest incomes, but is also used by extremely high net worth individuals. Please contact me to discuss how this can fit into your specific situation.


The Hypothetical Policy

Let us assume that we are dealing with Mr. John Smith, a 40 year old male non-smoker. He is in good (but not exceptional) health. He is able to obtain a whole life policy with an initial death benefit of $30,000. Added to this is a 30-year level premium term rider with a death benefit of $120,000.

The required annual premium for this policy is $1200 in years 1-30, and $1000 in years 31-55. To break that down: The whole life policy is $1000 per year until age 95. The term insurance rider is $200 per year for 30 years.

The total death benefit at the beginning of the policy is $150,000, and the total cash value is $0.

The whole life policy’s cash value is guaranteed to increase every year, even if no dividends are ever paid. The cash value will equal the death benefit when the insured turns 121 years old.

Not so attractive, right?

Well, that’s why we have the term insurance rider. The term rider creates more “room” in the policy to purchase Paid Up Additions, or PUAs. (Again, refer back here for more details on the terms.)


Thinking Like a Business Owner

It’s useful at this point to use a metaphor. Treat this policy as a business that you own.

The required annual premium is your minimum overhead just to have a store at all. In this example, it’s $1200. Think of that as the cost of running the air conditioning, paying your employees’ wages, leasing the building, and so forth. If you don’t pay it, you don’t have a business at all.

Now that you have a business and you are covering your minimum operating expenses, you need products that will actually earn a profit. If the business you run is a grocery store, it’s the groceries that you sell to the public. In the life insurance policy “business,” that’s your PUA payments.

If you own a grocery store, how many groceries do you want to put on your shelves? As many as possible! (If you have a 4,000 square foot grocery store and only put out a dozen heads of lettuce for sale, how much do you think you will make in profit? Not much!)

But, let’s say that John Smith is new at this, and is feeling a little timid about his new life insurance policy business. The maximum PUA (which is determined by the IRS, the policy itself, and by the way the agent has designed the policy) is $8,000 per year, but Mr. Smith decides to put in $5,000 beyond his $1,200 operating expenses and “see how it does.”

His grocery store has lots of products for sale, but the space hasn’t been completely maximized. Throughout this year he eventually sells everything he purchased, but wasn’t able to turn a profit. (Other expenses came up—after all, most new businesses are not profitable for 5 to 10 years!)


How Much Do PUAs Earn?

If we pretend that our policy premiums are running a grocery store, you can see that the initial money spent by John is $6,200: $1,200 in operating expenses and $5,000 in groceries. However, PUAs are not store inventory, and are not sold to the public. Keep the business owner mindset in mind, but understand that John Smith is opening a bank, not a grocery store.

For now, let us consider what PUAs actually are. They are additional life insurance paid for with a single premium payment. Because they are immediately “paid up,” they generate immediate cash value. They can also earn dividends.

So let’s look at this single PUA payment of $5,000 over time. (Again, I want to remind the reader that these numbers are based on real data but are made up to illustrate the concepts.)

If the $5,000 PUA is submitted with the initial payment for the policy, the cash value in approximately 2 weeks will not be $0. It will be something like $4,614. A dividend earned on just the PUA portion of the policy at the end of the first year might be around $123.

PUA cash values are guaranteed to increase every year, just like the base whole life cash value is guaranteed to increase. Between the guaranteed increases and the potential dividends, here is what the growth of the initial $4,614 at the end of each year might look like:

  • 1st Year: $4,737
  • 2nd Year: $4,948
  • 3rd Year: $5,168
  • 4th Year: $5,396
  • 5th Year: $5,634
  • 6th Year: $5,883
  • 7th Year: $6,142
  • 8th Year: $6,412
  • 9th Year: $6,693
  • 10th Year: $6,985


Increasing Rate of Increase

As you can see, the value is increasing, but so is the rate of increase. This is the power of compounding growth. (The dividends buy more PUAs, which in turn earn more dividends.) At the end of year 20, this might be $10,650. Let’s look even further:

  • 30th Year: $15,978
  • 40th Year: $23,418
  • 50th Year: $33,105
  • 60th Year: $45,063

Remember that this is just a single payment of $5,000 into the PUA rider. When dividends are declared, the original whole life policy also generates more PUAs, that also have guaranteed cash value, and can also earn their own dividends.

Even isolating the PUA payment, however, you can see that this element of the business is profitable by the end of the 3rd year. So long as dividends are paid, this will likely remain true for every PUA payment.

Unlike a grocery store, there is no risk that some of the produce purchased will be damaged, go bad before being purchased, or be stolen by employees. Whole life cash value can not decrease, only increase. It will increase every year, but it will increase even more quickly when dividends are paid.

So, our 40-year-old entrant into the life insurance policy “business” can make a payment of $5,000 payment in exchange the potential of over $28,000 worth of profit, tax-free, over the next 50 years. This would take him to age 90. (The contract will continue to generate cash value until age 121, should he live that long!)


Putting the Cash Value to Work

Now that you can see how the PUA cash value can grow without any further action from you, let’s examine ways to put that money to work. Remember that we are assuming an initial cash value of the $5,000 PUA as $4,614.

John knows a thing or two about the stock market, so he takes a policy loan from the life insurance company for $4,000 and buys a stock that he expects to increase in value. He holds the stock for one year and sells at a 15% profit. After paying taxes on his gains, he has $4,450.

His policy loan has rolled over at 5% interest per year, so his policy loan balance is $4,200. What happens when the policy loan is repaid?

$4,450 net profit from his investment, minus $4,200 to pay back his policy loan, leaves him with an additional $250. What should he do with this? Buy an additional $250 of PUA.

While the policy loan was outstanding, something else has happened, and this is the key to the entire concept: He earned the full dividend, even while he used a policy loan to invest elsewhere. So, his cash value doesn’t go back to $4,614. It increases to $4,737, the “end of the 1st year” number from our table above. After adding the new $250 PUA, another $230 or so gets added to the PUA cash value, which means the cash value is now $4,967.


What About Debt?

The math will become quite complicated at this point, but let’s say that John sets all of this up and puts in his $5,000 PUA as we did above. Let us further assume that he just entered his last year of payments on a 5-year car loan at 7% interest. The original loan amount was $17,500 and he has diligently paid his minimum payment of $346.52 per month, for 4 years.

The current loan balance is $4004.78, and so far, he has paid $3,161 in interest to the lender. (Check my math, here.)

Mr. Smith’s life insurance policy “bank business” could buy the entire remaining debt from the original lender. Should it?


John Smith should take out a policy loan of $4004.78 from his “Smith Family Bank” and buy the full debt. He now owns his car free and clear. However, he should continue to pay 346.52 per month. If he pays this to his bank, he will pay off the loan more quickly than the loan to the original lender.


The interest rate on the auto loan is 7%, and it compounds monthly. The interest rate from “Smith Family Bank,” (really a policy loan from the insurance company) is 5% compounded annually. $346.52 per month to the original lender would pay the loan off in 12 full months. Paying this to Smith Family Bank, the 12th payment would only need to be $299.30. That’s $45.99 leftover, that can then be used to purchase additional PUAs.

(For clarity: Policy loan interest accrues daily but the total rate for an entire year is only 5%. The above calculation assumes paying the balance back monthly. Daily accrual can be calculated using this calculator.)


What About the Operating Expenses?

You may say, “This all sounds great, but you are ignoring that there is a required premium of $1,200 every year just to keep this policy active!”

That is true, but consider that these examples have had their efficiency hampered significantly. First, PUAs have only gone in for one year. Second, only $5,000 was paid into the PUA rider. The allowable maximum is $8,000 in PUA per year, in this example. What kind of grocery store buys “some groceries” one time, and then never restocks the shelves? What kind of bank goes to the trouble of getting established, and then only makes one loan?

Let’s look now at “maxing out” the PUA contributions. After all, every PUA payment can grow according to the same pattern outlined above.


Maxing Out the Cash Value Growth

Now that we have isolated the PUA rider to show its incredible ability to earn dividends even while a loan is outstanding against it, let us now examine the Smith Family Bank business as a whole.

If John Smith pays $9,200 per year into this policy—$1,200 for the base policy and term rider, and $8,000 to the PUA rider—if dividends are declared each year the policy will likely be profitable in the 6th year. (Remember how long it takes to build a profitable business?)

But this assumes that no policy loans are taken to buy profit-producing investments!

Can John take out a policy loan to pay off his car loan? Yes he can, as we have seen!

Can he use this to buy mutual funds? Absolutely!

What about buying a car to lease to other people? Yes!

How about purchasing other people’s debt? You bet!

He can take out a loan to buy his family’s next home, start a business, purchase cryptocurrencies, fund a vacation, pay for his daughter’s wedding, finance every single car his family needs for the rest of their lives—anything.

That’s because Smith Family Bank isn’t a bank—it’s a life insurance policy. The life insurance company doesn’t care what the money is for.

Diligently maximizing the allowable PUAs to this hypothetical policy, let’s take a look at the amount paid in versus the amount that Smith Family Bank can deploy to do anything its owner would like to do.


It Only Gets Better

Let’s look at the total cash value of this policy (whole life cash value, PUA cash value, etc.) at the end of selected years, versus the total amount paid in. Remember that these are fake numbers, computed based on the assumptions in a real life insurance illustration. The year in which cash value exceeds the total amount paid in premiums is shown in bold.

  • 1st Year: $9,200 paid in, $8,020 cash value
  • 2nd Year: $18,400 paid in, $16,248 cash value
  • 3rd Year: $27,600 paid in, $25,699 cash value
  • 4th Year: $36,800 paid in, $35,214 cash value
  • 5th Year: $46,000 paid in, $45,515 cash value
  • 6th Year: $55,200 paid in, $56,186 cash value
  • 7th Year: $64,400 paid in, $67,345 cash value
  • 8th Year: $73,600 paid in, $78,940 cash value
  • 9th Year: $82,800 paid in, $91,011 cash value
  • 10th Year: $92,000 paid in, $103,693 cash value
  • 20th Year: $184,000 paid in, $262,979 cash value
  • 30th Year: $276,000 paid in, $498,003 cash value
  • 40th Year: $326,000 paid in, $789,322 cash value
  • 50th Year: $336,000 paid in, $1,123,033 cash value
  • 60th Year: $341,000 paid in, $1,537,140 cash value

I want to stress that this is not an investment. This is a place to store your money, so that when an investment opportunity comes your way, you can jump at it!

Furthermore, this is just one particular way to build a policy. The design may vary widely from person to person.



As we have explored, the limit of this strategy is not so much John’s income, but rather his patience, understanding and creativity.

Without patience, he will never get a policy started because it “takes too long to make money.” (Hopefully you can see that this is not a helpful way of thinking about it!)

Without understanding and creativity, even if he has the policy, he won’t take policy loans and utilize it for what it is—a private banking system that can produce income far beyond what any illustration will show.

Anyone considering such a plan should start where they can start. Expanding the system to multiple policies can be done as experience helps to inform the new “banker” of what the next steps should be.

When you are ready to see how this can be applied to your own life, click here to schedule an initial call with me.

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