Cash value

Definition

Cash value is a savings component found in certain types of life insurance policies, particularly whole life and universal life insurance. It accumulates over time as policyholders pay their premiums and can be accessed by the policyholder during their lifetime, either through withdrawals or loans, providing a financial resource beyond the death benefit.

5 Must Know Facts For Your Next Test

1. Cash value grows on a tax-deferred basis, meaning policyholders won't owe taxes on the growth until they withdraw funds or surrender the policy.
2. The amount of cash value accumulated depends on the type of policy, the premiums paid, and the length of time the policy has been in force.
3. Policyholders can borrow against their cash value, but unpaid loans will reduce the death benefit if not repaid.
4. Some policies allow for flexible premium payments, which can affect how quickly cash value builds up.
5. Surrendering a policy means giving up coverage in exchange for the cash value minus any fees or outstanding loans.

Review Questions

• How does cash value differ from the death benefit in life insurance policies?
  • Cash value is a savings feature within certain life insurance policies that accumulates over time and can be accessed by the policyholder during their lifetime. In contrast, the death benefit is the amount paid out to beneficiaries upon the insured's death. While cash value can be utilized while alive, the death benefit is only accessible after passing away, highlighting their distinct roles within life insurance.
• What factors influence the accumulation of cash value in a life insurance policy?
  • Several factors impact how cash value accumulates in a life insurance policy, including the type of policy chosen (such as whole or universal life), the premiums paid, and how long the policy has been active. Additionally, some policies allow for flexible premium payments, which can accelerate cash value growth depending on the amounts paid. Understanding these factors helps policyholders maximize their investment in life insurance.
• Evaluate the implications of borrowing against cash value and its impact on overall financial planning.
  • Borrowing against cash value can provide immediate financial resources without needing to surrender a policy or lose coverage; however, it comes with risks. Unpaid loans accrue interest and reduce both the available cash value and death benefit, potentially impacting beneficiaries. Careful evaluation of this option is crucial in financial planning to ensure that it aligns with long-term goals and does not jeopardize overall financial security.

Related terms

death benefit: The amount paid to beneficiaries upon the death of the insured, which is separate from the cash value component.

premium: The regular payment made by the policyholder to keep the insurance policy active, contributing to both the cash value and the death benefit.

policy loan: A loan taken against the cash value of a life insurance policy that must be repaid with interest to avoid reducing the death benefit.