Life Insurance Information Dictionary

Cash Value Definition

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The Dictionary of Insurance Terms and Definitions

Cash value is an account of actual money, which is a component of certain life insurance policies.  Primarily, cash value is equity, meaning that at any time, a policy owner can surrender his or her policy in exchange for the equity, walking away with the cash value.  Cash value's use does not end there, though; cash value can be borrowed against or withdrawn (in the case of universal life insurance).

Cash value life insurance is both transferrable and easily liquidated, which means that it is a useful financial asset.  It can be assigned as collateral for a loan or sold outright to a new owner.

The two main types of cash value life insurance policies are whole life insurance and universal life insurance.

In whole life insurance, a fixed percentage of each of your premiums goes into your cash value account.  Your cash value accrues interest at a fixed, guaranteed rate for the duration of the policy.  This guarantee of fixed interest makes whole life insurance rather expensive.

In universal life insurance, cash value is the core of your policy: all of your premium payments go directly to cash value.  Instead of being paid directly by you, the insurer periodically takes its fees from your cash value.  This structure makes it possible for the policy owner to pay premiums whenever he or she pleases and in whatever amount he or she pleases.  In standard universal life insurance, the interest rate at which cash value grows is set (arbitrarily) by the insurance company may change at any time (but it will not fall below a certain minimum).

The terms "cash value life insurance" and "permanent life insurance" are used interchangeably by many speakers.  99% of the time, such synonymy is not in error, but technically, a non-permanent (term) life insurance policy may hold cash value, and a non-cash-value policy may be permanent.  An example of the former is universal term life insurance (though it is rare and in fact may not be available from any insurer at this time).  An example of the latter is NLG universal life insurance.

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