What is cash value for life insurance?
As you pay premiums on a permanent life insurance policy, you can build cash value—a kind of separate account within the policy (or an annuity).1 To help it grow, after policy charges, your provider sets aside a portion of your premiums into the separate account, which can earn interest.
Permanent life insurance generally stays in effect for as long as you pay your premiums. This differs from term policies, which don't build value and typically last for set periods like 10, 20 or 30 years. (After that period, you can continue the policy but likely will pay more each year—most term policies feature “level” premiums—as you age).
You can use your cash value by borrowing against it, withdrawing some of it, or withdrawing it all at once and surrendering the policy. (Withdrawals over the amount of premiums paid are usually taxable.) Also, you can use permanent life insurance to build tax-deferred value to help supplement your retirement income.
These features make permanent policies more expensive than term insurance with similar coverage amounts—but the cash value could help the policies pay for themselves over time.
Cash value vs. cash surrender value
Cash value can build as you pay premiums and the insurance policy’s (or annuity’s) account value is credited interest. If you need to use all of your cash value at once, you must either borrow against it (and repay the loan with interest) or cash out entirely.
When you cash out, you “surrender” the policy or annuity, which could result in surrender charges. The remaining balance—cash value minus surrender charges—is your "cash surrender value."
Cash value and cash surrender value can be the same amount if you've held the product for long enough, but they often differ due to fees. (You should calculate the surrender fees if you no longer need your policy and are thinking of using the money. Life insurance policies are intended to be held for the long-term.)
Also, surrender value differs slightly for insurance policies and annuities:
Permanent life insurance— You can access your cash value in three ways: (1) borrowing against the policy (you’ll have to repay with interest), (2) withdrawing some of your money, or (3) canceling the policy to receive the surrender value.
Annuities— Depending on how long you've owned an annuity, getting your cash value may carry different charges. This will be determined by whether you want to make a full or partial surrender. Also, you may pay withdrawal fees based on your age. An annuity's surrender value is the total of payments you've made plus any investment gains or interest, minus prior withdrawals or outstanding loans.