Cash value (account value)

An indexed universal life (IUL) policy pays a death benefit and builds a cash value alongside it. Premiums go in, charges come out, and index credits are added at the end of each segment. Illustrations and statements also label the same balance the account value or the policy value, and older guides call it the cash value account or cash accumulation.

How it works

The cash value moves in a set order:

1. Each premium is received and any premium charge is deducted.
2. The balance is allocated to the indexed accounts and the fixed account the policyholder has chosen. Premium that arrives after the lock-in date, one to three business days before the index day depending on the contract, waits in a holding account earning fixed interest until the next segment starts.
3. Each month the insurer deducts the cost of insurance and the other policy charges from the cash value.
4. At the end of each 12-month segment the index credit is worked out with the cap, the participation rate and the 0% floor, and added to the segment. Index accounts credit on price return only, so index dividends are excluded.
5. A partial withdrawal reduces the cash value permanently. A policy loan leaves it in the policy, with the loan recorded as a debt against it; the loaned part earns a fixed credit or the index credit, depending on the loan type.

Charges come off every month and credits arrive at the end of the segment, so the cash value can fall in a year when the index falls, even though the credit itself is never negative.

Worked example

Illustrative figures, not a forecast. A policy starts a segment with a cash value of US$200,000. Settings: 9% cap, 100% participation, 0% floor. Charges for the year are taken as US$4,000.

• Index up 11%: credit 9%, or US$18,000. Cash value at the end of the year about US$214,000.
• Index up 4%: credit 4%, or US$8,000. Cash value about US$204,000.
• Index down 5%: credit 0%. Cash value about US$196,000, the fall being the year's charges.

The cash surrender value is the cash value less any surrender charge and outstanding loan, so in the early years it sits below these figures.

In an international IUL

Capital for Life reads the account value column of an illustration, not the net cash surrender value. The account value shows how the policy is building, while the surrender value in the early years mainly reflects the surrender charge schedule, which typically runs for the first 10 to 15 years. Growth inside the cash value compounds gross of tax within the policy; the tax on money taken out depends on where the policyholder lives and, for a trust, where the settlor and beneficiaries live. Where an offshore trust or company owns the policy, the cash value belongs to the trust or company as policyholder.

Common questions

Is cash value the same as account value?

Yes. Insurers use cash value, account value and policy value for the same balance: premiums less charges, plus credits, less withdrawals. The figure that differs is the cash surrender value, which takes off any surrender charge and outstanding policy loan.

Can the cash value of an IUL go down?

Yes. Index losses are never credited, but monthly charges and withdrawals reduce the cash value, and unpaid loan interest adds to the loan secured against it. "You are guaranteed to never lose money from stock market losses in an Indexed Universal Life policy for the rest of your life."

How long does it take to build cash value in an IUL?

In a well-funded policy, meaningful cash value typically builds over 7 to 12 years. The longer premiums are spread to fund a policy, the more the policy takes to recover, because it supports the same death benefit throughout.

Go deeper: how IUL works and taking money out by loan or withdrawal.