Life insurance policies and annuities can grow in value over time. Permanent life insurance includes a death benefit on top of a cash value accumulation, while annuities accumulate cash value and make payments to holders.
Cash surrender value
Also known as "surrender value," the cash surrender value is the amount of money an insurance or annuity company will pay the policy or annuity holder if the contract is voluntarily terminated before its maturity date. The cash surrender value of a given policy or annuity is based on the accumulated value to date minus surrender fees as specified in the policy or annuity's contract.
Permanent life insurance includes a death benefit as well as an accumulated value. When you pay your premiums for your insurance policy, a percentage of those payments goes toward your death benefit, as well as your insurance company's operating costs and profits. The leftover portion of your premium is used to build up your policy's cash value. Your insurance company can then invest this money, and as you pay your premiums over the years and earn more of a return, the cash balance of your policy will grow.
Once your life insurance policy has a sizable accumulated value, you can apply that money toward your premiums instead of having to pay for them out of pocket. You can also borrow money against your policy's accumulated value or take that money and invest it. In this regard, the accumulated value of a life insurance policy functions similarly to a savings account. Another way to look at accumulated value is the amount of equity you've built up in your life insurance policy.
Just as a life insurance policy builds value over time, so too can an annuity. When you buy an annuity, you might pay a lump sum as a single up-front premium, or you might pay multiple premiums over time. The money you put into your annuity serves as the basis for its cash value, and as your premiums are invested, that value can grow based on how well those investments perform. An annuity's accumulated value represents its overall value based on the premiums paid plus return on investment.
Cashing out an insurance policy or annuity
Some insurance policies and annuities come with hefty surrender charges that can wipe out or even exceed their respective accumulated values. For this reason, cashing out a life insurance policy or annuity prematurely isn't always a cost-effective way to get access to additional funds.
Certain investments are another great way to build and protect your net worth; visit our broker center to get started investing today.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.