Cash value
Encyclopedia
The cash value of an insurance contract
, also called the cash surrender value
or surrender value, is the cash amount offered to the policyowner by the issuing life carrier upon cancellation of the contract. This term is normally used with a life insurance contract
.
To receive the cash value, the policyholder is normally obliged to surrender the policy received at outset of the contract to the issuing life insurance company as documentation of rights under the contract.
Cash values are usually agreed for the case of premature cancellations in those forms of insurance contracts, especially life insurance contracts, in which a portion of the premiums go toward an investment, like whole life insurance
or endowment life insurance
and other forms of permanent life insurance
. Such amounts are often certain to be paid, either in case of death or in case of survival, and therefore not under risk. The contract determines for each possible cancellation date the related cash value. If the investment of premiums is contractually made in an individual account, the cash value is the value of the investments in that account at any particular time. Such cash value credited to an individual account during the tenure of the policy keeps growing with every payment of premium. It also increments due to interest
credited.
The policyholder may also be able to use the cash value as collateral
on a loan.
The cash value will often be similar or even equal to the reserve to be held by the insurance company for the net obligations from the contract. As such, the amount is usually invested and earns investment income for the insurance company which is to some extent forwarded to policyholders of participating
contracts.
Since often initial premiums are not invested but covering initial costs associated with selling the contract (up front or front-end fee), the amount available may be significantly lower than the sum of premiums paid for some time, initially even zero. Later, interest credited might compensate that initial loss.
The value of the investment is often subject to a surrender charge in determining the cash value. A surrender charge offsets the costs associated with selling the contract and allows these contracts to be sold with little or no up front fees. Surrender charges are imposed when a contract is cancelled within a set time frame. Any cancellation after that time frame are not subject to a surrender charge. Typically surrender charges decrease on an annual schedule until they disappear altogether.
Insurance contract
In insurance, the insurance policy is a contract between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for payment, known as the premium, the insurer pays for damages to the insured which are caused by...
, also called the cash surrender value
Cash surrender value
The sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life...
or surrender value, is the cash amount offered to the policyowner by the issuing life carrier upon cancellation of the contract. This term is normally used with a life insurance contract
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
.
To receive the cash value, the policyholder is normally obliged to surrender the policy received at outset of the contract to the issuing life insurance company as documentation of rights under the contract.
Cash values are usually agreed for the case of premature cancellations in those forms of insurance contracts, especially life insurance contracts, in which a portion of the premiums go toward an investment, like whole life insurance
Whole life insurance
Whole Life Insurance, or Whole of Life Assurance , is a life insurance policy that remains in force for the insured's whole life and requires premiums to be paid every year into the policy.-History:...
or endowment life insurance
Endowment policy
An endowment policy is a life insurance contract designed to pay a lump sum after a specified term or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit...
and other forms of permanent life insurance
Permanent life insurance
Permanent life insurance is a form of life insurance such as whole life or endowment, where the policy is for the life of the insured, the payout is assured at the end of the policy and the policy accrues cash value....
. Such amounts are often certain to be paid, either in case of death or in case of survival, and therefore not under risk. The contract determines for each possible cancellation date the related cash value. If the investment of premiums is contractually made in an individual account, the cash value is the value of the investments in that account at any particular time. Such cash value credited to an individual account during the tenure of the policy keeps growing with every payment of premium. It also increments due to interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
credited.
The policyholder may also be able to use the cash value as collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
on a loan.
The cash value will often be similar or even equal to the reserve to be held by the insurance company for the net obligations from the contract. As such, the amount is usually invested and earns investment income for the insurance company which is to some extent forwarded to policyholders of participating
With-profits policy
A with-profits policy or participating policy is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company, or had been one when it began its with-profits product line...
contracts.
Since often initial premiums are not invested but covering initial costs associated with selling the contract (up front or front-end fee), the amount available may be significantly lower than the sum of premiums paid for some time, initially even zero. Later, interest credited might compensate that initial loss.
The value of the investment is often subject to a surrender charge in determining the cash value. A surrender charge offsets the costs associated with selling the contract and allows these contracts to be sold with little or no up front fees. Surrender charges are imposed when a contract is cancelled within a set time frame. Any cancellation after that time frame are not subject to a surrender charge. Typically surrender charges decrease on an annual schedule until they disappear altogether.
Guaranteed cash value
The determination of the cash value, both the base amount and the applicable surrender charge, in the contract can be explicit by determining the value for each surrender date (guaranteed cash values), by referring to the value of specific investments or subject to the discretion of the insurance company, which is often executed to bring cash values in line with values of the investments of the insurance company. Guaranteed cash values can result in significant risks for the insurance company, if the guarantee exceeds the economic value of policyholders' rights under the contract and the value of reserves hold.See also
- Actual cash valueActual cash valueIn the property and casualty insurance industry, Actual Cash Value is a method of valuing insured property.Actual Cash Value is computed by subtracting depreciation from the replacement cost. The depreciation is usually calculated by establishing a useful life of the item and determining what...
- Life insuranceLife insuranceLife insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
- Permanent life insurancePermanent life insurancePermanent life insurance is a form of life insurance such as whole life or endowment, where the policy is for the life of the insured, the payout is assured at the end of the policy and the policy accrues cash value....