What Is Cash Value?

Cash value is an amount that is often associated with the worth of a life insurance contract. If the policyholder of life insurance, for instance, opts to end an arrangement with a provider and cancel the contract, the cash value of that agreement is what the holder of the policy receives. This amount is typically different than what would have been paid to beneficiaries had the life of the policy continued for the remainder of the contract.

The cash value is typically pertinent for a life insurance policy that is permanent in nature as opposed to a term policy. This is because term policies are often associated with temporary coverage over a given period of time, which effects the equity that is established. A permanent policy, on the other hand, includes a savings component, which makes the extension of the cash value of a life insurance product to policyholders possible.

As policyholders consistently make payments to the issuer of a life insurance policy, eventually the amount is likely to exceed the actual cost of insurance based on certain criteria. This overage amount may be placed in a separate account by the policy issuer and can even grow based on interest rates. Actual cash value amounts are determined based on a host of determining factors, which should be outlined by an insurance provider, according to Benefit House, a prominent clearinghouse of insurance services and information.

Some of the factors that influence the cash value of a permanent life insurance policy include the death benefit, duration for which the policy was owned, and the period of time over which payments toward the policy were made. A policyholder may use the cash value as an advantage in various capacities. For instance, in the event a life insurance policy is canceled altogether, the policyholder may receive a payout for the cash-value amount. It's also possible to use the amount in the savings component of a policy toward keeping a policy active in the event that payments need to be stopped for a period of time. Under certain conditions, policyholders may be able to access a portion of the cash that is in the separate account.

Certain tax advantages exist for policyholders of a permanent life insurance product tied to the cash value component of this product. Present taxes are not applied to the money that accumulates in the savings component of this type of plan. Tax benefits may also be accessed in the event a policyholder pursues a partial withdrawal from the savings component of a life insurance policy.