Whole life insurance is a type of permanent life insurance that provides coverage for the entirety of the insured person's life. It also contains a savings component, in which cash value may accumulate. This cash value is the amount of money in the policy, which grows slowly at first but can accelerate over time. Policyholders can borrow or withdraw a portion of their cash value for current use. Modified whole life insurance offers lower premiums than a standard policy in the first two or three years, and higher-than-standard premiums in the later years. This type of policy is more expensive in the long run.
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 person dies. When a policy is terminated, the insurance company will pay out the cash value minus any surrender charges or fees, policy loans, or prior withdrawals. Surrender charges can be as high as 10% to 35% of the policy's cash value and usually last for 10 to 15 years.
In the case of modified whole life insurance, the cash surrender value will depend on when the policy is terminated. If the policy is terminated during the first two or three years, the cash surrender value will be higher than that of a standard policy. However, if the policy is terminated after this initial period, the cash surrender value will be lower than that of a standard policy.
Characteristics | Values |
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Definition | The cash surrender value is the amount of money a policyholder receives when they cancel their permanent life insurance policy before it matures or before they pass away. |
Cash Value | Cash value is the amount of money in the policyholder's account. It is the savings component of a permanent life insurance policy. |
Surrender Value | Surrender value is the actual amount of money a policyholder will receive if they withdraw all of their cash value. |
Surrender Fees | Surrender fees are charged by insurance companies for cancelling a policy. They typically apply for the first 10 to 15 years of a policy and start at 10% to 35% of the policy's cash value. |
Taxation | The cash surrender value is generally handed over tax-free if it doesn't include proceeds that are more than the cost of the life insurance policy. If the surrender value is higher than the premiums and surrender fees paid, income tax is owed on the excess. |
Policy Termination | When a policyholder surrenders their policy, the coverage ends and their beneficiaries will not receive a death benefit. |
Universal Life Insurance | Universal life insurance policies have variable cash and surrender values that depend on current interest rates, cost of insurance, and expense charges. |
Whole Life Insurance | Whole life insurance policies have a guaranteed rate of growth for their cash value and surrender value. |
What You'll Learn
What is cash surrender value?
Cash surrender value is the amount of money a life insurance company pays to a policyholder if they cancel their plan before it matures or they pass away. This cash value is the savings component of most permanent life insurance policies, such as whole life and universal life. It is also known as the policyholder's equity.
The cash surrender value is the amount left over after fees when you cancel a permanent life insurance policy. Not all types of life insurance provide cash value. The cash value is the amount of equity in a life insurance policy. A policyholder builds cash value with premium payments, and it grows over time.
In a whole life policy, the cash value growth is guaranteed. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid. As time goes by, you build more cash value, which increases your cash surrender value.
When you surrender a policy, you receive whatever you paid in premiums back tax-free. If you receive more than you paid in total premiums, you owe income tax on your earnings.
The cash surrender value of a life insurance policy is equal to the total accumulated cash value, minus prior withdrawals, outstanding loans, and surrender charges.
Universal life insurance, universal variable life, and variable life insurance policies typically include a surrender period. If you cancel during this period, you may owe a surrender charge of up to 35% of your cash value balance. The insurer will deduct this charge from your cash value balance and pay you the remainder for your surrender value. There is no surrender charge when the surrender period ends, usually after 10 to 15 years.
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How does cash surrender value work?
Cash surrender value is the amount of money a life insurance company pays out to a policyholder if they decide to cancel their plan. This cash value is the savings component of most permanent life insurance policies, such as whole life and universal life. It is also known as the policyholder's equity.
A policyholder builds cash value with premium payments, and this grows over time. The cash value of a whole life policy typically earns a fixed rate of interest.
When you surrender a policy, you receive whatever you paid in premiums back tax-free. If you receive more than you paid in total premiums, you owe income tax on your earnings.
The insurance company could deduct a fee before paying out the cash value, known as a surrender charge. The surrender charge can start as high as 10% to 35% of your policy cash value. If your policy has a surrender charge, it goes down over time. Most policies end the surrender charge after 10 to 15 years. At this point, your cash surrender value equals your cash value.
The cash surrender value of a life insurance policy is equal to the total accumulated cash value, minus prior withdrawals, outstanding loans, and surrender charges.
If you surrender your policy, you end your life insurance contract. You stop having to pay premiums and will receive all your cash surrender value. However, you lose your life insurance protection, and your heirs will no longer receive a death benefit when you pass away.
As an alternative to surrendering your policy, you could take a partial withdrawal. This maintains your life insurance and whatever cash value is still in the policy will continue to grow. You can withdraw up to what you paid in premiums tax-free. If you withdraw your cash value gains, you would owe income tax on the gains. Partial value withdrawals will reduce your death benefit.
You can also access your cash value with a loan. You do not owe income tax for borrowing cash value when you take out a loan, but the insurance company will charge interest until you pay the money back. You decide when to pay the money back. If you die with an unpaid loan, the insurance company will use your death benefit to pay off the loan, and then pay whatever is left to your heirs.
You can also use the cash value to cover your insurance premiums. Your insurance company will deduct the cost of your insurance from your cash value balance. Once you spend down all your cash value, you need to start paying the premiums again or lose your coverage.
In most whole life insurance plans, the cash value is guaranteed, but it can only be surrendered when the policy is canceled. Policyholders may borrow or withdraw a portion of their cash value for current use. In universal life insurance plans, the cash value isn't guaranteed. However, after the first year or two, it may have enough cash value built up to be partially surrendered (withdrawn).
Surrender fees will reduce your surrender value. These costs and the policy's surrender value can fluctuate over the life of a policy. After a certain time period, the surrender costs will no longer be in effect, and your cash value and surrender value will be the same.
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When to consider surrendering your policy
Modified whole life insurance is permanent life insurance in which premiums increase after an initial period of lower payments. While it is more expensive in the long run, it can be a good option for those who need the lower payments in the first few years.
Whole life insurance generally has a level premium and death benefit and provides a guaranteed benefit upon the death of the insured, regardless of when they die. Part of the premiums you pay for a whole life policy goes to a savings component known as the cash value. Those funds are invested with a guaranteed return, and after they’ve grown big enough, you can borrow from or withdraw from the cash value, tax-free.
You found a better deal
Although life insurance quotes rise with age, you may be able to qualify for a more affordable policy now compared to when you first took out your current one. For example, your health may have improved significantly, or you may have quit smoking. In this case, it may be worth shopping around for a new, cheaper policy. Make sure your new policy is in force before surrendering your current one. Also, before buying new life insurance, look into whether a 1035 exchange could save you money on taxes.
You can't afford the premiums
Permanent life insurance is significantly more expensive than term life insurance. If the premiums are taking a big bite out of your income, you may be better off with a cheaper term life policy. Shop around for term life insurance coverage to compare costs and find a better deal.
You no longer need life insurance
There are some instances when you simply may not need life insurance coverage anymore. For example, if no one depends on you financially, you may not need life insurance. It may not make financial sense to keep your policy in force.
You need a large amount of cash quickly
If you have a major expense to cover or a better investment opportunity but don't have any liquid assets to tap into, surrendering a cash-value life insurance policy may be a good option, especially if your actual need for life insurance has diminished.
You want to put extra cash in your pocket
Cancelling a life insurance policy you no longer want or need can be a way to put extra cash in your pocket. You may need this money for cost-of-living increases or even to fund a long-dreamed-of vacation.
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How is cash surrender value calculated?
Cash surrender value is the amount of money a life insurance policyholder receives for cancelling their policy before it matures or they pass away. This cash value is the savings component of most permanent life insurance policies, such as whole life and universal life.
The cash surrender value of a life insurance policy is equal to the total accumulated cash value, minus prior withdrawals, outstanding loans, and surrender charges.
To calculate your cash surrender value, you must consider any fees your company will charge for cancelling your policy. Check your cash value balance, then subtract any surrender charges to determine how much money you will receive.
For example, suppose you take out a variable universal life insurance policy for $100,000. You make five years' worth of payments and build up a cash value of $10,000. However, the surrender charge will cost you 10% of the cash value. You will have to pay $1,000 in charges and will only get $9,000 out of the cash surrender.
The surrender charge can start as high as 10% to 35% of your policy cash value. If your policy has a surrender charge, it will go down over time. Most policies end the surrender charge after 10 to 15 years. At this point, your cash surrender value equals your cash value.
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Does term life insurance have cash surrender value?
Term life insurance does not have a cash surrender value. This is because it does not have a cash value component, which is the savings element of a life insurance policy that the policyholder can withdraw while they are still alive. Cash value is common among permanent life insurance policies, such as whole life insurance, and it is this feature that can be surrendered for a cash value.
Cash value is built up over time as the policyholder pays their premiums. A portion of the premium is put into a separate cash value account, which grows with interest over the life of the policy. Once enough cash value has been accumulated, the policyholder can use the money for a loan, to pay premiums, or for a cash withdrawal.
Term life insurance is a much simpler product than permanent life insurance. It is designed for the sole purpose of providing a death benefit payout when the policyholder dies. It does not have any additional features that can be utilised while the policyholder is alive, such as a cash value account. This makes term life insurance more affordable than permanent life insurance.
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Frequently asked questions
The 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.
The cash surrender value equals the policy's cash value minus surrender fees. Any loans you've taken against the policy or unreimbursed withdrawals will also decrease the cash surrender value.
No. Term life insurance doesn't have a cash surrender value because it only offers a death benefit and doesn't build cash value.
If the surrender value is more than the premiums and surrender fees you paid, you'll often owe income taxes on the excess.
Cash value is the amount of money that accumulates in the savings component of a permanent life insurance policy. Cash surrender value is the amount of money the policyholder gets when they terminate their policy. Cash surrender value is usually the cash value minus surrender fees.