What does the term "capital retention" refer to in life insurance?

The term "capital retention" in life insurance refers specifically to the strategy of only taking out the interest earned on a policy while conserving the principal amount. This approach is significant because it allows the policyholder to maximize the growth potential of the principal by leaving it intact, thereby ensuring a stable base that continues to generate interest over time. By retaining the capital, policyholders can benefit from compound interest, which can significantly increase the value of their investment in the long run, as the principal continues to earn returns without being diminished by withdrawals.

This strategy is often used in life insurance policies that accumulate cash value, such as whole life or universal life policies, where the goal is to maintain the financial security and growth potential of the investment while still providing liquidity through the interest that can be accessed without impacting the core investment.