Cash value life insurance is permanent life coverage that builds a savings component over time, in addition to paying a death benefit.
How value is created
Part of the premium goes toward mortality costs and expenses, and part is allocated to policy cash value. That value grows with interest and credits specified by the contract, then becomes part of policy economics.
Policy and claims implications
The cash value supports:
- Partial withdrawals.
- Policy loans.
- Potential reduction of coverage if premiums stop and the value cannot sustain extended term coverage.
Practical example
A policyholder buys 20 years of premium with a long-term horizon. In year ten, the accumulated cash value may be used to pay future premiums, but the death benefit may be lower if loans are outstanding.