Accumulated Value Basics, Role in Life Insurance Policies

What Is Accumulated Value?

The accumulated value is the total amount an investment currently holds, including the capital invested and the interest it has earned to date. The accumulated value is important in the insurance field because it refers to the total acquired value of a whole life insurance policy. Accumulated value, also referred to as accumulated amount or cash value, is calculated as the sum or total of the initial investment, plus interest earned to date.

How Accumulated Value Works

For insurance purposes, accumulated value begins to build when the policyholder of a whole (or universal) life insurance policy starts paying a monthly premium. An insurance company takes those premium payments and divides them into two portions. The first portion covers the basic insurance policy costs. The second portion acts as a type of investment that accumulates cash value, which is placed in an internal account by the insurance company.

A policyholder can also surrender a whole life insurance policy to the insurance company and receive the cash surrender value of the policy in return. The cash surrender value can be less than the accumulated value if the policy has surrender charges. Depending on the terms of the whole life policy, a policyholder can borrow against the cash surrender value of the policy. The policyholder can then choose to repay the loan in full, repay just the interest, or not pay back the loan or interest. If the loan isn't repaid in full, the amount outstanding will be deducted from the final death benefit.

Accumulated value can be thought of like a forced savings account, which the policyholder can borrow against while keeping the policy intact. If the policy owner cancels the policy, they'll receive accumulated cash value minus any penalties.

Special Considerations

Value accumulated in a whole life insurance policy is tax-deferred so long as the policyholder keeps the insurance contract valid. Accumulated value can be an integral component of a tax-savings strategy because it maximizes the amount of money you get to keep.

Withdrawing accumulated funds during a policyholder's retirement years might even allow a policyholder to qualify for a lower income-tax bracket. By contrast, the accumulated value in a certificate of deposit is taxable immediately.

Accumulated Value vs. Annuities

The accumulation value of an annuity is the overall value of the annuity. However, the cash surrender value differs from the accumulated value in that the amount available to withdraw from the policy is subject to a 10% surrender penalty.

For example, an annuity’s accumulated value could be $100,000, but after penalties, the cash surrender value is $90,000. If a policyholder wanted to roll over the annuity, the new account would receive is $90,000.