How to Calculate Life Insurance Cash Value

Some types of life insurance policies, including whole life, universal life and variable life, can accumulate cash value during the policyholder's lifetime. Policy holders can choose to receive the cash value as a lump sum, or take out a bank loan using the policy's cash value as collateral. The longer the policy holder keeps the policy active, the higher the cash value grows. Policy holders should understand how to calculate a policy's cash value to determine how much they can receive.

When a policy holder makes a premium payment, some of that payment goes towards increasing the policy's cash value. The insurance company invests that money into a low-yield investment instrument, such as bonds or mutual funds. As long as the policy holder maintains the scheduled premium payments, the cash value will continue to grow. If the policy holder chooses to use the proceeds from the investment pool to make premium payments, the cash value will not grow as quickly.

The purpose of a life insurance policy is to provide the policy holder's beneficiary with the policy's value upon the policy holder's death. This "death benefits" payment forms one of the bases for calculating the policy's cash value. When a policy holder initially purchases a policy, the death benefits amount is the policy's face value. As the policy holder maintains the premium payment schedule, a portion of those payments goes toward increasing the death benefit payment. The cash value becomes a higher fraction of the death benefit the longer the policy holder keeps up the premium payments.

For some whole life policies, the policy itself will contain a cash value chart. The chart shows how much the cash value is expected to appreciate over the years. Each line in the chart includes the number of years the policy holder maintains the policy and the corresponding cash value per $1,000 in death benefits. For instance, suppose a policy with a $250,000 death benefit contains a cash value chart. The chart shows "300" for Year 10. Since the death benefit is $250,000, the policy holder divides the death benefit by $1,000, to get 250. The cash value of the policy in Year 10 will be 300 (from the chart) multiplied by $250 (thousands in death benefits), or $75,000.

Since policy holders can borrow against the cash value in their policies, the balances of these loans can reduce the policy's cash value. Policy holders can only borrow up to the limit of the cash value, not up to the limit of the death benefit amount. Borrowers who incur loans that meet or exceed the policy's cash value can see their policies lapse. When the policy lapses, the beneficiary does not receive the death benefit payment.