4.1.4 Policy Reserves vs. Cash Values
It may be difficult to grasp the difference between policy reserves and cash values but there is a difference to be noted. States require insurance companies to keep a certain amount of funds in reserve and recorded as liabilities, not liquid assets, to ensure sufficient funds are available to meet projected future claims.
The policy reserve is an intangible (untouchable) amount that is set aside by the insurer out of the insurer's assets at the beginning of the policy period. The amount set aside is based on calculations of the present value of future net premiums being equal to the present value of future claims considering the assumed interest rate, mortality and morbidity tables, etc.
The cash value is basically a savings account that develops within the policy that builds in value through premium payments and belongs to the policyowner. The cash value represents the additional funds paid in the early years of a whole life policy which can be borrowed against, which makes it a tangible (touchable) asset.
Policy Reserve - Belongs to the insurer
Cash Value - Belongs to the policyowner