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Cash value refers to an investment component in life insurance that grows tax-free over the course of the policy's life. Cash value is a part of permanent life insurance policies and is a living benefit that the policyholder can use during his or her lifetime. [1]
Cash values are usually associated with whole life insurance or endowment life insurance and other forms of permanent life insurance. 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 minus a surrender charge. 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. If a policyholder dies without using the cash value, the policyholder's beneficiaries will only receive the death benefit and not the cash value.
The policyholder may also be able to use the cash value as collateral on a loan, make withdrawals or use it to pay insurance premiums.
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 (upfront 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 upfront fees. Surrender charges are imposed when a contract is cancelled within a set time frame. Any cancellations after that time frame is not subject to a surrender charge. Typically surrender charges decrease on an annual schedule until they disappear altogether.
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.
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect against the risk of a contingent or uncertain loss.
Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policyholder typically pays a premium, either regularly or as one lump sum. The benefits may include other expenses, such as funeral expenses.
Variable universal life insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy.
Term life insurance or term assurance is life insurance that provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the life insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more endowment policies. The phrase "endowment mortgage" is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal term.
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee. An underwriting arrangement may be created in a number of situations including insurance, issues of security in a public offering, and bank lending, among others. The person or institution that agrees to sell a minimum number of securities of the company for commission is called the underwriter.
Universal life insurance is a type of cash value life insurance, sold primarily in the United States. Under the terms of the policy, the excess of premium payments above the current cost of insurance is credited to the cash value of the policy, which is credited each month with interest. The policy is debited each month by a cost of insurance (COI) charge as well as any other policy charges and fees drawn from the cash value, even if no premium payment is made that month. Interest credited to the account is determined by the insurer but has a contractual minimum rate. When an earnings rate is pegged to a financial index such as a stock, bond or other interest rate index, the policy is an "Indexed universal life" contract. Such policies offer the advantage of guaranteed level premiums throughout the insured's lifetime at a substantially lower premium cost than an equivalent whole life policy at first. The cost of insurance always increases, as is found on the cost index table. That not only allows for easy comparison of costs between carriers but also works well in irrevocable life insurance trusts (ILITs) since cash is of no consequence.
Guarantee Security Life Insurance Company, or GSLIC, represented one of the most severe cases of insurance fraud in Florida history. According to the Florida Insurance Commissioner:
[GSLIC] was, almost from the beginning, a massive fraud, aided and abetted by blue-ribbon brokers and licensed professionals motivated by their own self-interest. The fraud at Guaranteed Security was a carefully orchestrated bank robbery. But the thieves disguised themselves with the help of accountants and brokers and lawyers rather than wearing silk-stocking masks.
Whole life insurance, or whole of life assurance, sometimes called "straight life" or "ordinary life", is a life insurance policy which is guaranteed to remain in force for the insured's entire lifetime, provided required premiums are paid, or to the maturity date. As a life insurance policy it represents a contract between the insured and insurer that as long as the contract terms are met, the insurer will pay the death benefit of the policy to the policy's beneficiaries when the insured dies.
A segregated fund or seg fund is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death. As required by law, these funds are fully segregated from the company's general investment funds, hence the name. A segregated fund is analogous to the U.S. insurance industry "separate account" and related insurance and annuity products.
An endowment policy is a life insurance contract designed to pay a lump sum after a specific term or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.
Critical illness insurance, otherwise known as critical illness cover or a dread disease policy, is an insurance product in which the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the specific illnesses on a predetermined list as part of an insurance policy.
In the United States, an annuity is a financial product which offers tax-deferred growth and which usually offers benefits such as an income for life. Typically these are offered as structured (insurance) products that each state approves and regulates in which case they are designed using a mortality table and mainly guaranteed by a life insurer. There are many different varieties of annuities sold by carriers. In a typical scenario, an investor will make a single cash premium to own an annuity. After the policy is issued the owner may elect to annuitize the contract for a chosen period of time. This process is called annuitization and can also provide a predictable, guaranteed stream of future income during retirement until the death of the annuitant. Alternatively, an investor can defer annuitizing their contract to get larger payments later, hedge long-term care cost increases, or maximize a lump sum death benefit for a named beneficiary.
Premium financing is the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by a third party finance entity known as a premium financing company; however insurance companies and insurance brokerages occasionally provide premium financing services through premium finance platforms. Premium financing is mainly devoted to financing life insurance which differs from property and casualty insurance.
A unit-linked insurance plan is a product offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan.
Finite risk insurance is the term applied within the insurance industry to describe an alternative risk transfer product that is typically a multi-year insurance contract where the insurer bears limited underwriting, credit, investment and timing risk. The effect is similar to self-insurance by the insured as they will pay the whole amount of the risk, but can spread it out over several years. The assessment of risk is often conservative.
Endowment selling is the selling of an endowment policy to a third party instead of surrendering it to the original life assurance company. This is often done in an attempt to gain more money than the value given when surrendering. It became common in the United Kingdom after with-profits endowment policies were sold to support mortgages in the 1980s and 1990s.
Fixed annuities are insurance products which protect against loss and generally offer fixed rates of return. The rates are typically based on the current interest rate environment. They are offered by licensed and regulated insurance companies. State insurance/insolvency funds guarantees vary from state to state, and may not cover 100% of the Annuity Value. For example, in California the fund will cover "80% not to exceed $250,000."
Juvenile life insurance is permanent life insurance that insures the life of a child. It is a financial planning tool that provides a tax advantaged savings vehicle with potential for a lifetime of benefits. Juvenile life insurance, or child life insurance, is usually purchased to protect a family against the sudden and unexpected costs of a funeral and burial with much lower face values. Should the juvenile survive to their college years it can then take on the form of a financial planning tool.
A with-profits policy (Commonwealth) or participating policy (U.S.) 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. Similar arrangements are found in other countries such as those in continental Europe.