Account Value vs. Cash Value - It's about the Surrender Charge
For Indexed Universal Life (IUL), the Account Value is the amount the policy contains that is invested on the policyholder's behalf in order to grow. When we speak of the rate of return on any index or other investment strategy, it applied to the Account Value.
The Cash Value, on the other hand, is the amount the policyholder may receive if he surrenders the policy. Cash Value is sometimes referred to as Surrender Value.
The Loan Value is the portion of the Cash Value available for loans to the policyholder. The Loan Value is always somewhat less than the Cash Value, since for any loan, the insurance company holds back a month or more of policy expense charges, lest the policy lapse right away.
The difference, if any, between the Account Value and the Cash Value is known as the Surrender Charge. Insurance companies impose a Surrender Charge against Account Values in the early years of the policy - usually 10 to 15 years. This charge reduces annually over that period until it disappears altogether. The rationale behind Surrender Charges is to recoup large up-front expenses insurance companies incur when setting up new policies. These expenses include medical exams, agent commissions, and underwriting expenses. If the company debited the policyholder all of the up-front expenses when they occurred, then they would be unable to charge a level premium in all years. The first year premium would vastly exceed those for subsequent years. Instead, the company assumes that the policy will stay in force for a long number of years, and calculate the premium accordingly. Only those policyholders who quit early, or want to access the policy's Account Value through loans, will be affected by a Surrender Charge.
Some carriers even offer an Early Cash Value Rider (for which you pay a fee) which waives or reduces the Surrender Charge, thus making more money available to the policyholder in the early years. The fee addresses the added risk of lapse in those years. (Back to IUL Table of Contents)