Policy cash flow refers to the movement of money into and out of a life insurance policy over time, including premiums paid, internal charges, credited interest or index earnings, dividends, loans, loan interest and withdrawals. For permanent and interest-sensitive products, understanding policy cash flow is essential to evaluating sustainability and performance. Positive cash inflows from adequate premiums and strong crediting must be sufficient to cover cost of insurance and expenses; otherwise, the policy may gradually deplete its cash value and eventually lapse. Policy cash flow analysis also examines how loans and systematic withdrawals affect long-term values, death benefit and potential tax consequences. For advanced planning strategies like premium financing, split-dollar or supplemental retirement income designs, policy cash flow modeling is critical to ensure that the policy remains viable under realistic assumptions and stress scenarios.

In real-world planning, advisors and case designers use policy cash flow illustrations to show clients how their policy behaves under different funding patterns, loan strategies and rate environments. In policy reviews, they may request updated in-force ledgers specifically to examine whether cash flows still support original goals. For example, a universal life policy with level premiums designed decades ago might now require increased contributions due to lower-than-expected crediting rates or higher mortality charges. In retirement income strategies, cash flow projections demonstrate how much income can be taken via policy loans or withdrawals before risking lapse or triggering taxable gain. Lenders and trustees analyzing premium-financed or trust-owned policies rely on detailed cash flow projections to assess collateral needs and long-term feasibility. Clear policy cash flow conversations help clients understand that life insurance is a dynamic financial instrument whose health depends on the balance between money going in, charges and money coming out.