What Is The Cash Surrender Value Of Life Insurance?

A PolicyScout breakdown of cash surrender value and what it is.
By Mike Parker
Updated Sep 4, 2022
A woman calculating her cash surrender value of her life insurance.
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Buying a life insurance policy can be difficult. Not only is choosing a policy difficult but understanding all of its terminologies, everything it has to offer, and what sets it apart from the rest can prove a challenge. 

One part of life insurance that many find confusing is cash value, particularly the cash surrender value — a feature associated with permanent life insurance.

This article will help you understand what cash surrender value is, what it does, its implications, and alternatives that could be a better fit for you.

What Is a Cash Value?

Cash value is the interest you earn on your policy that can be withdrawn or borrowed if necessary. It is guaranteed to return a minimum interest rate. 

If you fail to pay your premiums or payments fall short, the cash value can be used to cover costs and the policy may expire.

It can also be used as collateral for loans or as an emergency fund in case you need money quickly. Cash value accounts usually take a long time to build up significant value and there are different ways that these funds can earn interest or grow.

If you’d like to learn about life insurance policies that have cash value accounts, check out our guide to cash value life insurance.

A person signing up for Life Insurance with their insurance agent.

Source: Pexels

What Is Life Insurance?

Life insurance is a type of long-term coverage that insures a person’s life. Life insurance policies are contracts between policyholders and insurance companies. 

A policyholder (the person covered by the life insurance policy) pays a monthly or annual premium to the life insurance company (the business offering coverage). 

In exchange, the life insurance company will pay out a death benefit to the insured person’s beneficiaries when they die.

Life insurance policies fall into two broad categories, term life, and permanent life. 

Term Life Insurance

Term life insurance plans only offer coverage for the policyholder over a fixed period. The word “term” simply means a period or length of time.

For example, a term life policy can last for a limited number of years, such as 20. If the insured dies within that period, then the beneficiaries will get the term life payout.

However, if the insured outlives that period, then the term life policy pays nothing out.

Permanent Life Insurance

Permanent or whole life coverage is a life insurance policy that does not expire and stays in place for your entire life. 

These life insurance contracts will only end if the policyholder stops paying their premiums or surrenders their policy.

Permanent life insurance has what is called a “surrender period”. During this time, the insured can decide whether or not they want to surrender (cancel) their policy.

Each policy will have a surrender fee schedule within the plan.

Permanent life insurance is designed to last your entire life and it has an additional cash value feature that builds value over time.

The cash value can be accessed to help pay your premiums, but that is not its purpose.

This cash value can also function as a kind of savings vehicle.

Terms You Should Know:

Surrender Fee Schedule: This is a type of schedule that compares the surrender fee percentage based on the year of the policy withdrawal.

Death Benefit: The amount of money that will be paid out to a policyholder’s beneficiaries when they die.

Premium: A regular payment made to an insurance company in exchange for insurance coverage.

Policyholder: The person who is insured by a life insurance contract.

Beneficiary: A nominated person who will receive the full, or a portion of, a life insurance contract’s death benefit.

A man signing up for Life Insurance.

Source: Pexels

What Is a Cash Surrender Value in Life Insurance?

If your permanent life insurance policy has built a significant cash value, or your financial situation is tight, you may have thought of canceling your policy to access the surrender value.

If the policyholder decides to cancel or surrender the coverage, then the insurance provider must pay all or a percentage of the cash value back to the policyholder.

This amount is known as the cash surrender value.

In other words, a cash surrender value is the cash value of a permanent life insurance policy minus the surrender charges/penalty.

Cash Surrender Value = (Cash Value) - (Surrender Charges and Penalties)

The insurance provider will also subtract any unpaid premiums or outstanding loan balances from a cash surrender value.

A cash surrender value is the amount of money that the policyholder will receive from their cash value account if they wish to cancel their policy. Typically, there is a penalty for an early policy withdrawal.

A cash surrender value is only associated with permanent life insurance policies as they earn a cash value over time.

Do Term Life Insurance Plans Have a Cash Surrender Value?

Whole, permanent, variable, and universal life insurance policies all have cash value components. Term life insurance, on the other hand, does not offer a cash value option.

How Is Cash Surrender Value Calculated?

In order to calculate the cash surrender value of your life insurance, you need to consider the following:

  • The duration of your policy

  • Your age

  • Your gender

  • The amount of coverage you have

  • The type of insurance policy you have

  • Whether your premiums are up to date.

  • The market performance of investment portions that are included in the policy

  • Surrender fees at the time

To easily calculate the surrender value, subtract any loan payments, balances, and surrender fees from the policy's cash value.

If you are struggling, you can always contact your insurance company to help you determine the exact cash surrender amount.

If you are still unsure, head over to PolicyScout’s life insurance hub to learn more about your policy. Or, contact our professional consultants at 1-888-912-2132 or Help@PolicyScout.com for additional help.

What Kinds of Life Insurance Have Cash Surrender Values?

Each permanent life insurance policy has a cash value component that you can access with either a loan or a withdrawal, or by surrendering your policy. 

Examples of these policies include:

Whole Life Insurance

Whole life insurance is a type of permanent life cover that has several advantages over other forms of permanent insurance. The most significant benefit is its predictability due to the guarantees contained in the policy.

  • The policy’s cash value will grow at a guaranteed fixed rate. 

  • The cash value component will also grow tax-free. 

  • Taxes will only apply if you surrender the policy for a cash payout. 

  • With whole life insurance, any death benefits paid to your beneficiaries are tax-free.

Universal Life Insurance

Universal life insurance is a policy that allows policyholders more flexibility around their death benefit amounts, premiums, and payment terms.

There are three types of universal life insurance policies:

  • Basic universal

  • Indexed universal

  • Variable universal

The stand-out feature of these policies is that they allow the policyholder and life insurance companies to invest the cash value component of their policy.

Universal life insurance has two options for how your death benefit is paid out:

  • Level death benefit: Death benefits remain the same throughout a policy's life. 

For example, if you purchase $100,000 of coverage and accumulate $60,000 as cash value for payments, your beneficiaries will receive $100,000 upon your death.

  • Combined death benefit: In the same situation, the death benefit is added to your cash value account, so your beneficiaries will receive $160,000. Premiums are typically higher with this option.

Variable Universal Life Insurance

Variable universal life insurance plans also offer a cash value account along with a death benefit. These plans cover the policyholder for their entire life and will only end if premiums are unpaid.

With variable life insurance, the cash value that a policyholder has can be invested, usually in various mutual funds, stocks, and bonds.

What are Mutual Funds?

Mutual funds are financial vehicles where members pool their money together. These funds are managed by financial professionals who invest the money in different ways with the aim of making a profit.

With variable universal life insurance, a policyholder’s cash value is placed in a mutual fund and then invested by a fund manager.

Because of this investment feature, variable life insurance policies are typically more expensive than other types of life insurance.

However, there is a risk factor with this feature. If you choose to invest the cash value into, for example, stocks and bonds, and the investment does not become profitable, you could lose your cash value completely and in turn your insurance policy.

A person calculating how much of their cash surrender value will be deemed taxable income.

Source: Pexels

Tax and Other Special Considerations

If you choose to cash out your policy’s value, the IRS may deem your cash surrender value as taxable income.

To determine this taxable income, calculate the total amount you have paid in premiums and subtract it from the cash surrender value amount.

For example, if your surrender value payout is $80,000 and you’ve paid $70,000 in premiums, you will be taxed on $10,000.

Along with the potential taxable income, if you do choose to cash out on your policy, you must know that this cancels your coverage.

Once you opt for a policy surrender there is no turning back.

The policyholder's beneficiaries will receive no death benefit and it will become difficult for you to get a new life insurance policy.

Do You Have to Surrender Your Policy? (Alternatives)

Surrendering your policy to take out its cash value will automatically end your coverage. 

If protection is still something that you need, there are alternative options to access your cash value without terminating your coverage.

Use the cash value to pay premiums: If you are struggling to keep up with your premiums, your insurance policy may allow you to use your cash value to help cover your premiums.

You could also opt for a ‘reduced paid-up’ alternative which exchanges your cash value for a smaller death benefit.

Make a withdrawal: You can also always withdraw money from your life insurance’s cash value instead of surrendering the policy and taking out the entire amount.

If the amount that you wish to withdraw is less than your premiums paid, you won't have to pay any income tax.

Make use of an accelerated death benefit (ADB) provision: If your insurance plan includes an ADB, you may be able to get a portion of your death benefit early. This is only possible if the policyholder has a chronic or terminal illness, or requires long-term care.

What Is a Living Benefit?

A life insurance clause that enables the policyholder to receive the benefits of the policy before death.

This type of benefit is normally used for those suffering from a terminal or high-cost illness which requires permanent nursing home assistance, or those living with a medically incapacitating condition.

Where Can I Learn More about Life Insurance?

Life insurance can become such an important aspect of your life, and understanding everything about your policy can help you make a decision that will benefit you. 

If you’re currently looking for life insurance or are curious about which policy is best, get in touch with one of our professional consultants for personal and tailored advice. Send us an email at help@policyscout.com or give us a call at 1-888-912-2132.

For more information or insurance quotes, and to get the process started, visit PolicyScout today.