What Is a Cash Value?

What Is a Cash Value?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Cash value, in the world of insurance, refers to the amount of money which builds up over time in certain types of life insurance policies. It functions almost like a savings account within your policy. You can withdraw or borrow against this cash value, potentially using it as a financial resource. However, it’s vital to note that any unpaid loans or withdrawals may reduce the death benefit of the policy.

Related Questions

1. How does Cash Value Build Up in a Life Insurance Policy?

Cash value builds over time as you pay premiums towards your life insurance policy. A portion of these premiums goes into a separate cash value account, which gradually grows with interest depending on the rate set by your insurer. Over several years, this cash value can accumulate considerably.

2. Can you Withdraw Cash Value from a Life Insurance Policy?

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Yes, you can withdraw money from the cash value of your life insurance policy. However, it should be noted that withdrawals may reduce the death benefit and could be subject to tax implications. Further, withdrawals cannot exceed the amount you’ve put into the cash value account, lest you incur additional tax liabilities.

3. What is the Difference Between Surrender Value and Cash Value?

Surrender value is the amount you’d receive if you choose to cancel your policy. It is the cash value minus any surrender fees and outstanding loans. The cash value refers to the total amount of money in the cash value account, and it usually takes some years to build up a significant amount.

4. Is Cash Value Included in the Death Benefit?

In most cases, the death benefit comprises only the policy’s face value and does not include the cash value. However, some types of life insurance integrate the cash value into the death benefit. It is advised to read your particular policy documents or consult with your insurer for specifics.

5. Does Cash Value Earn Interest?

Yes, the cash value of a life insurance policy does earn interest. The rate is usually determined by the insurer and can either be fixed or variable based on the market conditions. This interest compounds over time, leading to a significant accumulation of cash value.