What Is Cash Surrender Value?
Cash surrender value refers to the money that a life insurance policyholder is entitled to receive upon canceling their policy prematurely, before its maturation or the insured individual’s demise. This amount represents the savings portion of various permanent life insurance policies, such as whole life and universal life, and is alternatively known as policyholder’s equity. It’s worth noting that an insurance company might levy a surrender charge, deducting a fee before disbursing the cash value.
Understanding Cash Surrender Value
Permanent life insurance policies often accumulate cash value over time through regular premium payments. This cash value represents an accessible fund that policyholders can tap into while alive. Should the policy be surrendered, the insurance company will issue a payout equivalent to the cash value.
In the case of a whole life policy, the growth of cash value is guaranteed, though initially, the returns are marginal compared to the premiums paid. As the policy matures, the cash value increases, resulting in a higher cash surrender value.
Upon policy surrender, a policyholder is entitled to a tax-free refund of the premiums paid. However, any surplus over the total premiums paid would be subject to income tax.
Cash Surrender Value vs. Cash Value
During the initial policy years, life insurance entities could withhold fees upon cash surrender. Consequently, the amount received as cash surrender value might be lower than the current cash value balance post fee deductions.
Surrender charges, typically ranging from 10% to 35% of the policy cash value, can diminish the cash value initially. However, these charges decrease over time, typically ceasing after a decade or more. At this juncture, the cash surrender value equates to the cash value.
The cash surrender value of a life insurance policy equals the accumulated cash value, less prior withdrawals, outstanding loans, and surrender charges.
How to Calculate Your Cash Surrender Value
Calculating your cash surrender value necessitates factoring in any cancellation fees levied by the insurer. Begin by checking your cash value balance, then deduct any surrender charges to ascertain the final amount you will receive through a cash surrender.
For instance, if you hold a variable universal life insurance policy worth $100,000, and after five years you’ve amassed a cash value of $10,000, a 10% surrender charge will cost you $1,000, leaving you with $9,000 post-deductions.
The cash surrender value does not necessarily reflect the coverage amount, as the cash value serves to offset rising premiums as the insured individual ages and grants access to borrowable funds.
Cash Surrender Value for Universal and Variable Life
Universal life, universal variable life, and variable life insurance policies typically impose a surrender period during which a potential surrender could incur charges of up to 35% of the cash value balance. These charges are deducted by the insurer, with the remaining balance paid out as the surrender value. The surrender charge usually expires after a specified period, typically around a decade or more.
Should You Surrender Your Policy?
Surrendering your policy signifies the termination of your life insurance contract, halting premium payments while granting you access to the cash surrender value. However, surrendering the policy also means forfeiting the life insurance protection, consequently depriving your heirs of the death benefit upon your demise.
Take a Partial Withdrawal
Opting for a partial withdrawal enables accessing a portion of the cash value while keeping the policy intact, allowing the remaining cash value to continue growing. Tax-free withdrawals are limited to the total premium amount paid, while withdrawals of cash value gains may incur income tax and diminish the death benefit.
Borrow With Cash Value Loans
Borrowing against the cash value is another avenue to access funds without incurring immediate income tax. Interest accrues on the loan amount until repaid, and in the event of the policyholder’s demise with an outstanding loan balance, the insurance company utilizes the death benefit to settle the debt before disbursing the remainder to beneficiaries.
Use the Cash Value to Cover Premiums
Employing the cash value to pay premiums aids in maintaining the coverage, with the insurance company deducting premiums from the cash value balance. Exhausting the cash value mandates a resumption of premium payments to retain coverage.
Which Kinds of Life Insurance Have Cash Surrender Values?
Permanent life insurance policies, such as whole, universal, variable universal, and indexed universal life insurance, possess a cash value component. Upon policy surrender, the policyholder receives the cash value less any surrender charges.
Should You Get a Policy With Cash Value?
Deciding on a policy with cash value hinges on individual financial circumstances. If financially viable and after exhausting other saving and investment options, a permanent life insurance policy with cash value may be advantageous. Conversely, for those facing financial constraints, such policies may not be advisable investment tools.
Can You Use the Cash Value and Still Keep the Policy?
It is often feasible to leverage the cash value to cover premiums while retaining the policy, thus preserving coverage for beneficiaries. Partial withdrawals and loans against the cash value also allow policyholders to access funds while maintaining the policy, albeit resulting in a reduced death benefit.
Can You Sell Your Life Insurance Policy?
In certain instances, selling a life insurance policy to a third party for cash, known as a life settlement, is an option, although not always the recommended course of action.
The Bottom Line
Cash surrender value embodies the amount refunded upon premature cancellation of a life insurance policy with a cash value feature. While only applicable to permanent policies like whole life and universal life, surrendering a policy may entail various fees and charges, potentially reducing the surrender value below the current cash value. Additionally, surrendering a life insurance policy impacts listed beneficiaries, as it nullifies insurance protection.
Note: Investment, tax, and financial services and advice are not provided by Investopedia. The content is presented without consideration of individual investment goals, risk tolerance, or financial circumstances, and may not be suitable for all investors. To devise a suitable retirement savings, tax, and investment strategy, investors are advised to engage a financial professional.