Savings Element

Cash value accumulated inside a life insurance policy. A cash value policy has two components: a death benefit paid to beneficiaries if the insured dies, and a savings element, which is the amount of premium paid in excess of the cost of protection. This excess is invested by the insurance company in stocks, bonds, real estate, and other ventures and the returns build up tax-deferred inside the policy. A policyholder can borrow against this cash value or take it out of the policy, at which point it becomes taxable income. Once a policyholder reaches retirement age, he or she can Annuitize the accumulated cash value and receive a regular payment from the insurance company for life. Insurance companies encourage people to buy policies with a savings element because it provides a disciplined way to save.