Term Life Insurance: Cash Surrender Value Explained

Term life insurance is a type of insurance that offers a financial payout when the policyholder dies. It does not have a cash surrender value, meaning that if you cancel your policy, you will not receive any money back. This is in contrast to permanent life insurance policies, which do have a cash value component. With permanent life insurance, a portion of your premiums is put into a separate cash value account, and these funds grow over time. If you cancel your permanent life insurance policy, you will receive the cash surrender value, which is the amount of cash you've built up minus any surrender charges or fees.

Term life insurance does not have a cash surrender value

Cash surrender value is the amount of money a policyholder receives when they terminate a permanent life insurance policy before it matures or before the insured dies. When you buy permanent life insurance, part of the premium goes toward insuring your life, and the remainder goes toward a cash value component that functions like a savings account. This cash value is the amount of money in your policy, and it can grow over time. If you opt to terminate your policy, you will receive the policy's cash surrender value, which is the cash value minus any surrender charges or fees, policy loans, or prior withdrawals.

Term life insurance is significantly more affordable than permanent life insurance because it doesn't offer a cash value component and has an expiration date. It is designed for the singular purpose of providing a death benefit payout when the insured person dies. There are no additional features that can be utilized while the policyholder is alive, such as a cash value account. This makes term life insurance simple and cheaper, but it does mean that policyholders won't have the added benefits that come with a cash value account, like being able to borrow from the account.

Only permanent life insurance policies have a cash surrender value

Term life insurance does not have a cash value, but permanent life insurance policies do. This is because permanent life insurance policies are designed to be a wealth-building asset, which means that they have a cash value that grows over time. This cash value can be accessed in various ways, such as through policy loans or by helping to pay premiums later on.

The cash surrender value is the amount of money that a life insurance company pays out to a policyholder if they decide to cancel their plan. This is different from the cash value, which is the total sum in the policy's cash account. The cash surrender value is calculated by taking the cash value and subtracting any surrender charges or fees, as well as any outstanding loans or withdrawals.

Permanent life insurance policies, such as whole life and universal life, offer a cash surrender value. In contrast, term life insurance policies do not have a cash value and, therefore, do not offer a cash surrender value.

The cash value in permanent life insurance policies grows tax-deferred. This means that as long as the money remains in the policy, it is not taxed and can grow faster. However, if the policy is surrendered or cash value is withdrawn, taxes may be owed on the amount received if it is more than the sum of the premiums paid into the policy.

It is important to note that surrendering a life insurance policy is a big decision, as it will result in the loss of life insurance protection for the policyholder's loved ones. There are alternatives to surrendering a policy, such as borrowing against the policy, withdrawing a portion of the cash value, or using the cash value to pay premiums.

Surrendering a life insurance policy means cancelling it

Term life insurance doesn't have a cash value like some permanent life insurance policies do, and it's more affordable as a result. Term life insurance is designed for the singular purpose of providing a death benefit payout when you die, and there aren't additional features that you can utilise when you're alive, like a cash value account. This makes term life insurance simple and significantly cheaper.

When you surrender a life insurance policy, you receive the cash surrender value, which is the total accumulated cash value minus prior withdrawals, outstanding loans, and surrender charges. Surrender charges can start as high as 10% to 35% of your policy cash value, and they decrease over time. Most policies end the surrender charge after 10 to 15 years.

Surrendering a life insurance policy can be done for several reasons. The annual cost of keeping the policy may be too high, or you may simply not need coverage anymore. You may have outlived your beneficiaries, or you may need the money more than your beneficiaries. You may also have found cheaper life insurance that better fits your needs.

There are two main downsides to surrendering a life insurance policy. Firstly, you lose your life insurance protection. Secondly, you may have to pay fees and lose some of your cash value.

Surrender fees can be waived if you notify the insurance company in advance

Term life insurance does not have a cash surrender value. Only permanent life insurance policies have a cash value component. However, if you have a permanent life insurance policy and are considering surrendering it, you may be able to avoid surrender fees by notifying your insurance company in advance.

Surrender fees are fees levied on a policyholder upon cancellation of their life insurance policy. These fees are used to cover the costs of keeping the policy on the provider's books. Surrender fees can be as high as 10-35% of the policy's cash value, but they decrease over time and are typically waived if the policyholder informs the insurer in advance of their intention to cancel.

If you are considering surrendering your permanent life insurance policy, be sure to review your policy contract, which should outline the details of the surrender process, including any fees that may be charged. It is also a good idea to contact your financial professional or insurance company to determine the current cash surrender value and understand any tax implications that may apply.

While surrendering your policy may provide you with a lump sum of cash, it is important to keep in mind that you will lose your life insurance protection and your beneficiaries will no longer receive a death benefit. There are alternative options to access your policy's cash value, such as taking out a policy loan or using the cash value to pay your premiums. These options allow you to maintain your coverage while still benefiting from the wealth-building aspect of your permanent life insurance policy.

Surrendering your policy is not always the best option

Surrendering your life insurance policy is not always the best option. While it can be a quick and easy way to get money, there are several reasons why you may want to consider other alternatives first.

Firstly, when you surrender your policy, you immediately lose your life insurance coverage. This means that your loved ones will no longer have the financial protection that the policy provided in the event of your death. If you still need life insurance, you will need to purchase a new policy, which may be more expensive or offer less coverage.

Secondly, there are often fees and taxes associated with surrendering your policy. Surrender fees can be high, typically ranging from 10-35% of the policy's cash value, and are usually highest in the early years of the policy. In addition, you may have to pay taxes on the surrender value if your earnings exceed the amount you've paid into the policy. These fees and taxes can significantly reduce the amount of money you ultimately receive.

Thirdly, surrendering your policy may result in a minimal return compared to other options. Insurance companies will typically give you a low offer, as their goal is to pay out as little as possible. However, by selling your policy through a life settlement, you can present your policy to multiple institutional investors and potentially get a much higher payout. According to LISA's 2023 Market Data Collection Survey, selling a policy averaged 622% higher payouts than the cash surrender value.

Finally, when you surrender your policy, you only get one offer from the insurance company, with no room for negotiation. In contrast, taking your policy to the open market allows you to seek multiple offers and negotiate to get the highest possible value.

Therefore, before surrendering your policy, it is advisable to explore other options such as partial withdrawals, policy loans, or using your cash value to pay premiums. These alternatives can help you access your policy's cash value while retaining your life insurance coverage, although they may also have potential disadvantages such as reduced death benefits or interest payments. Consulting a financial professional can help you understand the best options for your specific situation.

Frequently asked questions