What does the term "cash value" refer to in life insurance policies?

The term "cash value" in life insurance policies specifically refers to the savings component of permanent life insurance. Unlike term life insurance, which provides coverage for a specified period and does not accumulate any cash value, permanent life insurance, such as whole life or universal life, includes a cash value component that grows over time. This cash value accumulates on a tax-deferred basis and can be accessed by the policyholder during their lifetime through policy loans or withdrawals.

As the policyholder makes premium payments, a portion of that payment contributes to the cash value, while the remainder covers the cost of insurance and other fees. This feature not only serves as a form of savings but can also provide financial flexibility, allowing individuals to borrow against it or use it for various needs, such as paying premiums or funding an emergency expense. Understanding this concept is crucial for those studying life insurance, as it differentiates permanent policies from term policies and highlights one of the potential benefits for policyholders.