Cash value is a term used in the life insurance industry to describe the portion of a permanent life insurance policy that accumulates value over time. Permanent life insurance is a type of life insurance that provides coverage for the duration of the policyholder’s life, as long as the premiums are paid. Unlike term life insurance, which provides coverage for a specified term, permanent life insurance includes a savings component, which is the cash value.
The cash value of a permanent life insurance policy grows over time as the policyholder makes premium payments. A portion of each premium payment is allocated to the cash value account, which is invested by the insurance company. The cash value grows tax-deferred and can be used by the policyholder in a number of ways, including borrowing against it or surrendering the policy for its cash value.
The amount of cash value that accumulates over time depends on a number of factors, including the amount of the premium payments, the length of time the policy has been in force, and the performance of the underlying investments. Some policies guarantee a minimum rate of return on the cash value, while others do not.
Uses of Cash Value
One of the primary uses of cash value is to provide a source of funds for the policyholder in case of an emergency or unexpected expense. Policyholders can borrow against the cash value of their policy, using it as collateral for a loan. The loan must be repaid with interest, but the policyholder has access to the cash without having to surrender the policy.
Another use of cash value is to provide a source of retirement income. Policyholders can surrender the policy for its cash value, which can be used to supplement retirement income. However, surrendering the policy may result in a tax liability, so policyholders should consult with a tax advisor before making any decisions.
Cash value is an important feature of permanent life insurance policies, providing policyholders with a savings component that can be used for a variety of purposes. While it is not the primary purpose of life insurance, it can provide valuable benefits to policyholders over the course of their lives. Policyholders should carefully consider their options before making any decisions about how to use their cash value, as there may be tax implications and other factors to consider.