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Insurance policy - cash value

hi all,

could someone explain to me the build of cash value in a whole life insurance policy?

As cash values increase and the insurance value decreases, the ongoing premium is paying for less and less life insurance.

I dont understand this statement.

Thank you

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The way insurance works, when you start a policy, you’re almost pure insurance and no cash value. As you pay a premium for the insurance, let’s say $100/mo, part of that goes into the cost of insurance, loading, etc, and the remaining value goes towards cash value. The cash value builds up over time which offsets the cost of insurance as you age.  Let’s say your coverage is $500K, and now you’re 70 years old and have $300k of cash value… The remaining $200k is your real insurance amount. The reason it works this way is because as people get older, the cost of  insurance gets higher. If there was no cash value, your premiums would continue to go up. The cash value allows for a level premium overtime.

That is a generalization as theres a lot more complicated stuff with universal life and whole life, and how they work differently. 


You can also have policies without a cash value that have level premiums.  The basic goal of pricing life insurance is to get the projected premiums to cover the projected benefits and expenses while producing the desired profit target:  it’s a big discounted cash flow exercise.

“Mmmmmm, something…” - H. Simpson

Yes, term policies will give you level premium but it’s all a big cash flow calculation, as yo u said… However, at some point, you have to renew and then it is no longer level.. Your old cost was $30/mo and your new cost is $3000/mo.. Heck, you may not even qualify anymore!

There’s also policies that have no cash value but will give you a “refund” if you hold it for X years.. Essentially its a backdoor cash value that’s not accessible until maturity. 

Anyway, I doubt any of this will be asked on the exam, at leaset not in this detail.