How Does Life Insurance Build Cash Value?

  1. 12689 POINTS
    Ted Ratliff
    Owner, SFS Associates,
    This can be complicated but I will try to keep it simple. If you have a Whole Life Policy, the premium is based on how long you are expected to live, averaged out over that length of time the policy is expected to be in force. Term Insurance seems cheaper because it is not designed to cover you for your whole life. That is why the cheapest form of life insurance is one year term. Every time a term policy renews the premium goes up until it eventually becomes unaffordable. Because a whole life policy averages these premiums out, you are paying more in the early years than term but in the later years you premium would be less than term, since the policy does not need to renew. The excess money collected in the early years is invested and after expenses the balance is put into the cash value. They use a lot of complicated formulas to determine this but this is a simplified explanation.
    Answered on April 10, 2013
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  2. 12689 POINTS
    Ted Ratliff
    Owner, SFS Associates,
    Life insurance spreads premium payments over your life expectancy.  As a result, in the early years you pay more for the insurance component than term insurance but in later years you pay less than you would one year term at the same age.  The excess premium in those early years is invested by the insurance company and is accumulated in the whole life policy in the form of guaranteed cash value.
    Answered on June 9, 2013
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  3. 5877 POINTS
    Stan Cox II
    Insurance Adviser - Broker, SC Insurance Services, Oahu, Hawaii
    The Cash Value or 'CV' of whole life insurance works a little differently among the various providers, but basically the premiums paid by clients goes into a General Fund owned by the Insurance company, (Provider). A large portion of that General Fund is invested in a wide range of investment products. The resulting profits are what produce the CV of your policy. Of course the amount paid into your CV is dependent on the Face Value, (death benefit), and the amount of premium you pay. (You can pay more than the minimum required premium). And your CV return is in the form of a guaranteed interest amount. In the case of Mutual (as opposed to Stock) companies, clients also receive dividends, which may be paid into the CV of the policy, or you may elect to receive it as annual cash payments.
    Answered on May 3, 2015
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