Cash surrender value

Cash surrender value is also referred to as cash value. It is the accumulated value of your paid-in premiums that exceeds the expenses of paying for the actual policy. Features of a life insurance policy's cash value include:

• Cash value is found with permanent life insurance. All major types of permanent life insurance discussed in this educator universal, variable, whole, and variable universal life accumulate a cash value.
• Cash value is not found with term life insurance. Unlike permanent life insurance, term life insurance does not accumulate cash value. As a result, there is no reserve to pay future premiums on a term life policy. The policy lapses, or expires, if you stop paying premiums.
• Cash value is a personal asset. The cash value that has built up in your life insurance policy is yours to claim. You can withdraw it or use it as collateral for a loan. Keep in mind that your death benefit is reduced by the amount of cash value that you may have withdrawn.
• Cash value grows on a tax-deferred basis. The benefits of tax-deferred investments are hard to beat.  Your money grows faster with the advantage of compounding than if it were in a taxable account.
• Reserve for paying future premiums. Cash value can generally be used to pay future premiums. Both universal and variable universal life insurance allow you to pay flexible premiums, tapping cash value to pay future premiums. A trade-off is that you first have to liquidate the subaccounts.
• Cash value can be annuitized. If you decide to withdraw the cash value from an insurance policy, your insurer can either give you a lump-sum amount or pay you an annuity. An annuity from the cash value of a life insurance policy provides a tax-favored stream of income to you or your heirs.

Next, we'll take a look at life insurers' practice of paying dividends to policyholders. We'll also look at using investment returns to evaluate a life insurance policy.