What role does cash value play in a permanent life insurance policy?

In a permanent life insurance policy, cash value serves an important function by providing a loan option against the policy. This cash value accumulates over time as you pay premiums and can act as a potential financial resource for the policyholder. The policyholder can borrow against this cash value, allowing access to funds without needing to surrender the policy. Interest is typically charged on these loans, and the policy remains in force as long as the loan balance and any accrued interest do not exceed the cash value.

The significance of cash value goes beyond just being a reserve that can be tapped into for loans; it also contributes to the policyholder's financial flexibility, offering a means to manage unexpected expenses or investments while keeping the death benefit intact as long as the policy remains active. This feature is one of the distinguishing aspects of permanent life insurance compared to term life insurance, where there is no cash accumulation or loan provision.

Understanding this function of cash value reinforces the value proposition of permanent life insurance, thus supporting financial planning for individuals on a long-term basis.