How Do Life Insurance Policies Build Cash Value?
The cash value within a life insurance policy can accumulate somewhat differently – depending on the type of policy that you own.
Overall, however, when a premium payment is made into a permanent life insurance policy, a portion of the premium will be put towards the policy’s death benefit. Another portion will go towards the policy’s cash value.
Over time, as the policy holder continues paying premiums, the cash will earn more interest, in turn allowing the cash to grow throughout the years.
In addition, because the cash value is allowed to grow on a tax-deferred basis, it can compound even faster than a taxable savings vehicle. This is because there is no tax due on the gain until the time it is withdrawn – therefore allowing gains to be earned on top of gains.