Cash value, also known as "termination refund" or "surrender value", is the amount that the life insurance company should return when the insured requests termination or surrender. In a long-term life insurance contract, the insurer usually needs to deposit a certain amount of liability reserve in order to fulfill its contractual responsibilities. When the insured requests to cancel the contract or surrender for any reason within the insurance validity period, the insurer shall return the balance of the deposited liability reserve minus the cancellation deduction to the insured, that is, the cancellation fee, that is, the cash value of the policy at the time of surrender.
Generally speaking, in the case of a certain amount of insurance, the risk is small when you are young, the required premium is small, and the risk is great when you are old, but in fact, insurance companies will adopt a balanced fixed premium method. In this way, the premium paid when you are young is higher than the premium you should pay. On the surface, the insurance company overcharged the premium, but in fact, the insurance company saved the premium paid when it was young and accumulated interest at a certain interest rate to make up for the deficiency of the premium in old age. The cash value statement is the result of accumulating interest in this way. Under normal circumstances, the cash value of the policy will not be available until two years later. If the payment is less than two years, the cash value of the policy is generally zero.
The reason why life insurance companies want to cancel the contract and deduct money instead of returning all the deposited liability reserves to the insured is for the following reasons:
(1) Death adverse selection increased. Because the infirm generally do not propose to terminate the contract halfway, and a large number of healthy people will inevitably increase the average mortality rate of the insured after terminating the contract.
(2) affect the use of funds and reduce the company's investment. Due to the termination of the contract, the life insurance company must withdraw certain funds and pay them to the canceller in time, resulting in the company losing part of the investment interest.
(3) Additional expenses need to be amortized. In the first year after the issuance of the policy, the excess fees were stopped due to the surrender or termination of the insured, which made it impossible to recover some of the extra premiums.
(4) The cancellation procedures need to be paid.
For the insured and the insured, the cash value has the following three functions:
1, the insured surrenders. The surrender fee is charged according to the cash value. If there is a policy loan, automatic prepayment, etc. When surrendering, the insurance company will first deduct the arrears and interest from the cash value.
2. Policy loans. Generally, the policy with the policy loan function takes the cash value as the denominator and allows the insured to borrow the maximum amount. Most insurance policies stipulate that the maximum loan amount of the insured shall not exceed 70% of the insurance contract.
3. Dividend. In the dividend insurance contract, the annual dividend enjoyed by the insured is based on the cash value. The dividend paid by the insurance company is not proportional to the total premium paid by the insured, but exists in the form of cash value. If the business personnel do not explain clearly to the insured, it will often lead to disputes in the next year's dividend.
Further reading: How to buy insurance, which is good, and teach you how to avoid these "pits" of insurance.