What is Cash Surrender Value?

Published August 31, 2020

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Cash surrender value is the accumulated cash value that accrues in certain types of permanent life insurance policies. Effectively, it’s the savings component built into some policy types, particularly Whole Life and Universal Life policies. The amount accrued is directly affected by the age of the policy and the total amount the policyowner contributes to the account. In the event the policyowner terminates the policy, the cash value is returned to the policyowner less any fees or penalties.

When you cancel your life insurance policy, you simultaneously null the death benefit. This means that your beneficiary will no longer receive payment in the case of your death—but it also frees you from having to make further premium payments.

While the cash surrender value amount can be significantly less than the death benefit, policyowners often use the money they receive for retirement or other life expenses. However, they should be aware that the tax consequences of surrendering a life insurance policy could impact the full value.

How Does Cash Surrender Value Work?

When you pay a premium for your life insurance policy, the insurance company invests a portion of that money into a cash value savings account. The money in this account constitutes your cash surrender value in the event of termination.

While some life insurance policies have a modest cash surrender value, others have no cash surrender value at all, so it is important to know the differences among them. For instance, Whole Life policies and Universal Life policies, which are forms of permanent life insurance, contain a cash surrender value. Term life insurance policies, which expire or become prohibitively costly at a predetermined date, do not have a cash surrender feature.

Potential gains from cash surrender value also vary from policy to policy. Whole Life insurance policies, for instance, offer a flat interest rate and occasional dividends. Meanwhile, Universal Life policies are determined by both a minimum interest rate (which can change over time) and the strength of the insurance company’s portfolio. Indexed Universal Life policies are linked to a stock index, while Variable Universal Life policies are tied to the portfolio created by the insurer.

In addition to serving as cash surrender value, the money in your cash value account can be applied towards your premiums. If you do not wish to cancel your policy but would like to withdraw some of the cash value for personal use, a loan or partial surrender may be possible. A partial surrender will reduce the death benefit but ensures that the beneficiary still receives some payout at the time of the insured’s death.

Key Takeaways:

  • Cash surrender value is the cash value of a life insurance policy, minus fees and penalties, that is paid to a policyowner in the event of voluntary termination.
  • The cash surrender value will be less than the death benefit of a policy.
  • Cash surrender value is specific to Whole Life policies and Universal Life policies, two forms of permanent life insurance. Term life policies do not have cash surrender value.
  • In Whole Life policies, cash value grows according to a flat interest rate. In Universal Life policies, it is subject to market forces––whether that’s the strength of a stock index or the insurer’s investment portfolio.
  • Instead of a full cancellation of your permanent life insurance, you can access the cash value of your account by taking out a loan or opting for a partial surrender of the cash value, but there are many drawbacks to this option.

Calculating Your Policy’s Cash Surrender Value

The cash surrender value in a permanent life insurance policy accumulates over time—so the longer you own your policy and the more premiums you pay, the higher your cash surrender value will be. Keep in mind that this value will be significantly less than the death benefit and the face value of your policy. The following criteria influence cash surrender values:

  • Type of policy. The cash value of Whole Life policies is determined by a fixed rate, while the value of Universal Life policies is subject to market fluctuations.
  • Length of the policy. The longer the policy has been in effect, the more time the cash value will have had to grow.
  • Quality of investments. The quality of the insurer’s investments will impact the cash value in a Variable Universal Life policy.
  • Market performance. The state of the stock market at the time of cancellation will impact the cash value of indexed and Variable Universal Life policies.
  • Fees. Insurance companies often set administrative and surrender fees, which may be higher if you terminate your policy shortly after it goes into effect.

Accessing Cash Surrender Values

If you cancel your permanent life insurance policy, be aware that some insurance companies will charge surrender fees for cancelling too early. It is best to check your individual policy to determine the fees because these vary from insurer to insurer, as well as over time within a policy.

Is the Cash Surrender Value Taxable?

Before you walk away with the full value, you may wonder, “Is the cash surrender value taxable?” Cash surrender values are partially subject to taxes. The portion that has accrued from your premium payments—referred to as the policy basis—can be withdrawn tax free. Any interest or investment gains—also known as the above basis—will be taxed. The cash surrender value tax can be high, and it is important to fully understand the tax consequences of surrendering your life insurance policy. You can contact your insurance company to learn the policy basis value and above basis value of your account. We also recommend that you speak with a tax or financial advisor prior to making decisions regarding your life insurance policy.

Key Takeaways:

To summarize, cash surrender value is the cash value of your permanent life insurance account that you may receive after terminating your policy if there is any accrued cash value. When choosing a life insurance policy or debating whether to cancel an existing one, be sure to understand the following:

  • Cash surrender value is determined by the length of time a policy is held and by the type of life insurance policy.
  • The cash value of Whole Life policies is determined by a fixed rate, while the cash value of Indexed and Variable Life policies fluctuates with the market.
  • Insurance companies can charge surrender fees and administrative fees which diminish the cash surrender value.
  • The tax on a life insurance cash value surrender should be considered. A portion of your cash value—known as the above basis amount—is subject to taxes.
  • The cash surrender value will be less than the death benefit that your beneficiary would receive after your death.

You may be eligible to receive more than your policy’s cash surrender value by opting for a life settlement. Coventry can evaluate your policy to determine if you qualify. Contact us today to learn more.

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