Life Insurance Is Not An Investment

How Long Does It Take To Build Up Cash Value?

In this article, I’m going to take on one of the most common myths in life insurance: that it takes forever to build cash value. I know that many people think that it takes many years to build cash value in a life insurance policy. But just think for a moment. If it took a long time to build cash value, would real estate investors do The Double Play?

The goal of this article is to show you that you can absolutely set up a life insurance policy and access a significant amount of cash value immediately. People just need to realize that not every policy is designed for maximum death benefit. You can also design a life insurance policy for maximum cash value. See an example.

Roughly 85% of every premium can go to the cash value in a properly-designed policy. This means that if you only put $100 of premium in a policy, you would only have 85-cents of cash value. But on the other hand, if you put $100,000 of premium into a policy, you would have about $85,000 that you could immediately borrow against. The funding level determines how quickly you build a significant amount of cash value. (See Example).

You’ll need to understand some of the basics of Life Insurance to understand that this is possible. If you haven’t already, you should download and read my eBook: How Life Insurance Works. In this article, I’m going to explain the difference between maximum over-funded policies and traditionally-funded policies. Then I’ll show you how you can make sure that you can access the cash value immediately.

Maximum Over-funded vs Traditional Policy Designs

Most people who buy a life insurance policy are interested in the death benefit. They want to get as much death benefit as they can for the lowest price possible. These are what I refer to as “Traditionally-designed policies. A policy like this would not be ideal for The Double Play. My clients use Maximum Over-funded policies for The Double Play. These policies are the polar opposite of traditionally-designed policies.

A maximum over-funded policy is designed to get the least amount of death benefit as possible for the premium. A policy like this results in the most cash value. Because the death benefit is so low relative to the amount of premium, the cost of insurance and fees are also minimized. The resulting cash value should be about 85% of the premium.

It’s important to realize that whatever your budget, you can get a policy to fit your needs. If you can only afford $100 per month, then start with that. If you can afford more, you’ll have a much more significant amount of cash value right away.

Traditionally-designed Policy 

This graph shows why a Traditionally-designed policy doesn’t have much cash value in the beginning. Notice the large gap between the death benefit and the cash value. This policy was designed for maximum death benefit. You need to understand that price is an important consideration for most people. That means that the insurance company should collect no more in premium than is necessary for the policy to meet its liabilities.

You can see that the cash value (Blue) slowly appreciates over time and eventually reaches the death benefit (orange). The cash value is an allocation of the insurance company’s own investments. Much of the premium is spent on the cost of insurance and fees associated with the high death benefit.

Maximum Over-funded Policy Design 

This graph is showing the cash value and death benefit of a maximum over-funded policy. You can see that the death benefit is minimized for the amount premium. Notice that the death benefit increases over time. This is because the death benefit is a function of the first year premium. The initial death benefit remains the same and the total death benefit is being pushed up as the cash value grows. In order to keep putting premium into the policy, the initial death benefit increment cannot be changed.

Notice that the death benefit drops at Age 54. This is because the client in this case is stopping the premiums after 10 years. It’s important to realize that when no more premium is going into the policy, the death benefit can be lowered. That means that the cost of insurance and fees are held to a minimum. The takeaway here is that the fees and charges are minimized throughout the life of the policy. This results in the greatest possible cash accumulation.

Accessing the Cash Value

It’s also important to realize that designing a maximum over-funded policy is only the first step. The next step is to select a company and policy with the riders we need that will allow for all of the cash value to be accessed immediately. That means making sure that there are no surrender charges.

Whole Life 

A whole life policy just needs to be properly designed. The bulk of the cash value will be in the form of paid-up additions. Surrender charges do not apply to paid-up additions so you can get a policy loan immediately.[1] 

Indexed Universal Life 

An indexed universal life policy will need a little more work to eliminate the surrender charges. The insurance company must have a rider that allows for the surrender charges to be waived. I need to point out that this is NOT common. Not every company offers a rider like this.

When the policy has the “Early Values” Rider, you will see that the surrender value on the illustration is equal to the cash value.

This table shows a screen shot of an illustration with the early values rider. Note that the surrender value is equal to the cash value every year.

This table shows a screen shot of the same illustration without the “Early Values” Rider on the policy. Note the lower surrender values compared to the cash value. Most real estate investors would not want this policy. They would prefer the design from above.

A Note On Policy Loans 

While you are at it, you should be sure to choose a policy that allows for a “Variable” loan right away. Most companies only offer “Fixed” loans in the first five years. You do not want to use a fixed loan. Learn more about Policy Loan Options.

If the company does not offer a variable loan right away, the workaround is to use a cash value line of credit. Over the long term, this is the best way to access the cash value. But, unfortunately, right now rates from banks are much higher than the rates for most policy loans.

Funding Schedules 

As I pointed out earlier, if you are only paying $100 per month in premium, it will still take awhile before you accumulate a meaningful amount of cash value. But that said, you would have the same problem regardless of where you put your savings. Life insurance is still a great place to begin your savings journey. You will have the death benefit protection, great growth rates and liquidity.[2]

On the other hand, if you have a significant amount of savings that you want to get into a policy, then you’ll want to get that cash into the policy as quickly as possible. A 4 or 5-year funding schedule may be the best way to get money into a policy quickly. After the 4 or 5 years, you will reduce the death benefit as shown in the graph above.


The goal of this article was to show you that you can absolutely design a policy with a lot of cash value that is available immediately. I wanted to bust the myth that it takes forever to build up cash value. It’s important that you choose a properly-designed maximum over-funded policy. Include riders that allow you to access the cash value immediately.

[1] Surrender charges apply to a policy in the first 10 to 15 years. It is the penalty you would pay if you surrendered the policy. Since the insurance company is going to great expense to underwrite the policy, they will penalize you if you cancel the policy. By the same token, they will not allow you to borrow more than the surrender value (Cash Value minus Surrender Charges).

[2] See my article on where to put your cash between deals. The article explains the benefit of the higher growth rates and liquidity. You can access the article here.

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