Cash Value
Cash value is the savings component of a permanent life insurance policy that grows tax-deferred and can be accessed through loans or withdrawals during the policyholder's lifetime.
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Exam Tip
Cash value = permanent life only (not term). Tax-deferred growth. Loans reduce death benefit.
What is Cash Value?
Cash value is a living benefit of permanent life insurance policies (whole life, universal life, variable life). Part of your premium goes into this savings account that grows over time.
How Cash Value Works
| Component | Description |
|---|---|
| Premium Payment | Part goes to cash value, part to insurance cost |
| Growth | Earns interest (guaranteed or variable) |
| Tax-Deferred | No taxes on growth while in policy |
| Access | Loans or withdrawals during lifetime |
Cash Value Growth by Policy Type
| Policy Type | How It Grows |
|---|---|
| Whole Life | Guaranteed minimum rate |
| Universal Life | Based on current interest rates |
| Variable Life | Based on investment performance |
| Indexed Life | Tied to market index with floor |
Accessing Cash Value
Policy Loans:
- Borrow against cash value
- No credit check required
- Interest charged on loan
- Reduces death benefit if unpaid
Withdrawals:
- Take money out (may reduce death benefit)
- Premiums paid out first (tax-free)
- Gains taxed as ordinary income
Cash Value vs. Death Benefit
The death benefit is typically separate from cash value. When the insured dies, beneficiaries receive the death benefit, not the cash value (though some policies add them together).
Surrender Value
If you cancel the policy, you receive the cash surrender value (cash value minus surrender charges).
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Whole Life Insurance
Whole life insurance is a permanent life insurance policy that provides lifetime coverage with fixed premiums, a guaranteed death benefit, and cash value that grows at a guaranteed rate.
Universal Life Insurance
Universal life insurance is a permanent life insurance policy with flexible premiums and death benefits, plus a cash value component that earns interest based on current market rates.
Policy Loan
A policy loan is a loan from an insurance company using the cash value of a permanent life insurance policy as collateral, which does not require credit approval and charges interest that accrues if unpaid.
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