Cash Value
The savings component of a permanent life insurance policy that accumulates tax-deferred over time and can be borrowed against or surrendered.
Full Definition
Cash value is the savings component of a permanent life insurance policy (whole life, universal life, IUL, variable UL). Premiums fund both the cost of insurance and cash value accumulation. Cash value grows tax-deferred and, in most policies, can be accessed three ways: (1) policy loan (funds borrowed against cash value; tax-free; accrues loan interest), (2) partial withdrawal (may be taxable above basis), (3) full surrender (taxable above basis; terminates policy). Cash value grows slowly in early years (most of the premium pays cost of insurance and load) and accelerates in later years. Cash value is the foundation of both the tax-free retirement marketing angle and infinite-banking concept marketing.
Example
A $250K whole life policy at age 30 accumulates ~$8K cash value by year 10 and ~$65K by year 25 on $3,000/year premium. At year 25 the policyholder can borrow against the cash value tax-free.
Related Terms
- IUL (Indexed Universal Life) — A permanent life insurance product with flexible premiums and cash value growth tied to a market index (e.g., S&P 500) with a floor and a cap.
- Whole Life Insurance — Permanent life insurance with fixed premiums, guaranteed cash value growth, and a guaranteed death benefit — the product behind most Final Expense sales.
- Tax-Free Retirement (TFR) — Marketing framing for IUL used as a supplemental retirement income vehicle via tax-free policy loans against cash value.