Telomerase is required for telomere maintenance and is responsible for the immortal phenotype of cancer cells. How telomerase is assembled and reaches telomeres in the context of nuclear architecture is not understood. Recently, the telomerase RNA subunit (hTR) was shown to accumulate in Cajal bodies (CBs), subnuclear structures implicated in ribonucleoprotein maturation. However, the functional relevance of this localization for telomerase was unknown. hTR localization to CBs requires a short sequence motif called the CAB box. Here, we reconstitute telomerase in human cells and determine the effects of CAB box mutations on telomere biology. We demonstrate that mutant hTR, which fails to accumulate in CBs, is fully capable of forming catalytically active telomerase in vivo but is strongly impaired in telomere extension. The functional deficiency is accompanied by a decreased association of telomerase with telomeres. Collectively, these data identify subnuclear localization as an important regulatory mechanism for telomere length homeostasis in human cells.