Cash value refers to an investment component in life insurance that grows tax-free over the course of the policy's life. Cash value is a part of permanent life insurance policies and is a living benefit that the policyholder can use during his or her lifetime.What Is Cash Value in Life Insurance?
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Cash value life insurance policies

Cash values are usually associated with

whole life insurance Whole life insurance, or whole of life assurance (in the Commonwealth of Nations), sometimes called "straight life" or "ordinary life", is a life insurance policy which is guaranteed to remain in force for the insured's entire lifetime, provided r ...

or endowment life insurance and other forms of

permanent life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the de ...

. The contract determines for each possible cancellation date the related cash value. If the investment of premiums is contractually made in an individual account, the cash value is the value of the investments in that account at any particular time minus a

surrender charge Surrender may refer to: * Surrender (law), the early relinquishment of a tenancy * Surrender (military), the relinquishment of territory, combatants, facilities, or armaments to another power Film and television * ''Surrender'' (1927 film), an ...

. Such cash value credited to an individual account during the tenure of the policy keeps growing with every payment of premium. It also increments due to interest credited. If a policyholder dies without using the cash value, the policyholder's beneficiaries will only receive the death benefit and not the cash value. The policyholder may also be able to use the cash value as collateral on a loan, make withdrawals or use it to pay

insurance premium Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

s. The cash value will often be similar or even equal to the

reserve Reserve or reserves may refer to: Places * Reserve, Kansas, a US city * Reserve, Louisiana, a census-designated place in St. John the Baptist Parish * Reserve, Montana, a census-designated place in Sheridan County * Reserve, New Mexico, a US ...

to be held by the insurance company for the net obligations from the contract. As such, the amount is usually invested and earns investment income for the insurance company which is to some extent forwarded to policyholders of participating contracts. Since often initial premiums are not invested but covering initial costs associated with selling the contract (upfront or front-end fee), the amount available may be significantly lower than the sum of premiums paid for some time, initially even zero. Later, interest credited might compensate that initial loss. The value of the investment is often subject to a surrender charge in determining the cash value. A surrender charge offsets the costs associated with selling the contract and allows these contracts to be sold with little or no upfront fees. Surrender charges are imposed when a contract is cancelled within a set time frame. Any cancellations after that time frame is not subject to a surrender charge. Typically surrender charges decrease on an annual schedule until they disappear altogether.

Guaranteed cash value

The determination of the cash value, both the base amount and the applicable surrender charge, in the contract can be explicit by determining the value for each surrender date (guaranteed cash values), by referring to the value of specific investments or subject to the discretion of the insurance company, which is often executed to bring cash values in line with values of the investments of the insurance company. Guaranteed cash values can result in significant risks for the insurance company if the guarantee exceeds the

economic value In economics, economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured through units of currency, and the interpretation is therefore "what is the maximum amount of money a spec ...

of policyholders' rights under the contract and the value of reserves hold.

References

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Cash value life insurance policies

Guaranteed cash value

See also

References