Definition
Also known as the cash surrender value, the term cash value applies to life insurance policies and other contracts that carry accumulating cash balances as part of the agreement. There are several types of insurance policies that carry a cash value; this includes whole life as well as universal life plans.
The cash value of the policy is paid to the policyholder upon termination of the agreement.
Explanation
A portion of each premium paid on these policies is directed into a cash account, which usually earns a guaranteed rate of interest too. Over time, the balance in the account will grow from both the premium payments as well as interest income.
The cash value of a policy is added to the insurance amount when providing the payment of benefits. That is to say, the total value of the insurance benefit is the amount of the insurance carried plus the account's cash value.
One of the benefits of owning an insurance policy that has a cash value is the money can be borrowed to pay for expenses like a down payment on a new home. It can also be used as collateral on a loan.
A surrender charge may be imposed if the contract is canceled before a pre-established timeframe, after which the charge no longer applies. If applicable, payment of the surrender charge is subtracted from the account's cash value.
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