Cash value

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.

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


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • cash value — n: market value Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. cash value …   Law dictionary

  • cash value — The cash value of an article or piece of property is the price which it would bring at private sale (as distinguished from a forced or auction sale); the terms of sale requiring the payment of the whole price in ready money, with no deferred… …   Black's law dictionary

  • cash value — The amount for which an article or piece of property may be sold at a sale which is not forced or compelled upon the seller where the terms of sale call for cash, no credit being extended to the purchaser; market value, fair market value, or… …   Ballentine's law dictionary

  • cash value — noun : the amount available to the owner of a life insurance policy upon termination before maturity, being the reserve held by the company against the policy less the surrender charge if any * * * Insurance. the nonforfeiture value of a life… …   Useful english dictionary

  • cash value — See actual cash value …   Dictionary of automotive terms

  • cash value — Insurance. the nonforfeiture value of a life insurance policy payable to the insured in cash upon its surrender. Also called cash surrender value, surrender value. [1895 1900] * * * …   Universalium

  • Cash-Value Life Insurance — A type of life insurance policy that pays out upon the policyholder s death, and also accumulates value during the policyholder s lifetime. The policyholder can use the cash value as a tax sheltered investment (the interest and earnings on the… …   Investment dictionary

  • Cash Value Added - CVA — A measure of the amount of cash generated by a company through its operations. It is computed by subtracting the operating cash flow demand from the operating cash flow from the cash flow statement. Cash value added is similar to economic value… …   Investment dictionary

  • Cash Value Added — Der Cash Value Added (CVA) ist eine Residualgewinngröße auf der Basis des Cash Flow Return on Investment (CFROI). Inhaltsverzeichnis 1 Berechnung 2 Bewertung 3 Kritik 4 Literatur …   Deutsch Wikipedia

  • cash value option — The right of an owner of life insurance policy to take the cash value of a policy which is a predetermined amount at a given point in time; generally limited to a specified period after default in premium payments …   Black's law dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.