Understanding Life Insurance: Calculating Cash Surrender Value

Cash surrender value is the amount of money a life insurance policyholder receives for cancelling their policy before it matures or before they pass away. This is a feature of permanent life insurance policies, such as whole life and universal life, and is not available with term life insurance. The cash surrender value is the total payout from the insurance company, which is the cash value minus any surrender fees or charges.

Whole life insurance

The cash surrender value of a whole life insurance policy is the amount of money the policyholder will receive if they decide to cancel the plan before it matures or before the insured dies. It is the total payout from the insurance company, which is the cash value minus any surrender fees or charges. Surrender fees are typically higher for newer policies and decrease over time, with most policies ending the surrender charge after 10 to 15 years.

The cash surrender value of a whole life insurance policy can be calculated by adding up the total payments made to the policy and then subtracting any fees charged by the insurance company for surrendering the policy early. This will give the policyholder the total actual payout they would receive.

It is important to note that the cash surrender value of a whole life insurance policy may be subject to taxation if the amount received is higher than the sum of premiums paid into the policy. Additionally, surrendering a life insurance policy means that the policyholder's beneficiaries will no longer receive a death benefit.

Universal life insurance

The cash surrender value of a universal life insurance policy is the current cash value of the policy less any surrender charges. The longer the policy has been in effect, the larger the cash surrender value will be, as the surrender fees are typically waived after 10 to 15 years. Policyholders can contact their financial professional or life insurance company to obtain their current cash surrender value. It is important to note that if the cash surrender value exceeds the amount paid into the policy, taxes may be owed on the difference.

When calculating the cash surrender value of a universal life insurance policy, the following factors should be considered:

• Duration of the account: The duration of the account is crucial as it reflects how long the policyholder has been contributing and how long the investment has had to grow.
• Amount paid: A portion of the premiums paid by the policyholder constitutes the investment capital in the cash value component of the policy. Therefore, the cash value and surrender value increase with higher premiums.
• Market performance: If the policy's cash value is tied to the market, market performance becomes a significant factor. Positive market performance can lead to higher investment returns and, consequently, a higher cash surrender value.

It is important to review your life insurance policy periodically to track the growth of the surrender value. Additionally, there are alternatives to surrendering your policy, such as withdrawing a portion of the cash value, taking out a policy loan, or using the cash value to pay insurance premiums.

Variable universal life insurance

When considering variable universal life insurance, it is essential to carefully assess the risks. While it offers increased flexibility and growth potential, there is a possibility of losing money if your investments perform poorly. Additionally, variable universal life insurance can charge high fees due to the combination of life insurance and investment components. It is crucial to compare it with other life insurance and investment options before making a decision.

Surrender fees

The amount of the surrender fee depends on how long the policy has been in place. For annuities and life insurance, the surrender fee often starts at 10% if you cash in during the first year. This fee decreases over time, dropping to 1% if you cash in during the ninth year, and there are typically no surrender fees after the ninth or tenth year. Surrender charges can apply for periods ranging from 30 days to 15 years for some annuity and insurance products.

In the case of mutual funds, short-term surrender charges may apply if a buyer sells the investment within 30, 60, or 90 days. These charges are designed to discourage people from using investments as short-term trades.

It is important to note that surrender fees are separate from any taxes that may be owed on the cash surrender value of a life insurance policy. If the cash surrender value is higher than the amount paid into the policy, the policyholder may owe taxes on the difference.

Cash value

When you purchase a permanent life insurance policy, a portion of your premiums goes into building this cash value, which grows slowly at first but can accelerate over time with compound interest. This cash value can be accessed in different ways, such as policy loans, withdrawals, or by surrendering the policy altogether.

Calculating Cash Surrender Value

The cash surrender value is the actual amount of money you will receive if you decide to terminate or surrender your permanent life insurance policy before its maturity or your death. It is calculated by taking the total sum of money in your policy's cash account and subtracting any surrender charges or fees. These charges vary depending on the insurance company and the type of policy but typically range from 10% to 35% of the policy's cash value, decreasing over time.

To determine the exact cash surrender value and how it is paid out, you need to refer to your specific policy contract, which should outline all the relevant details. Keep in mind that the cash surrender value will usually be less than the total premiums paid during the early years of the policy due to surrender fees.

Whole Life Insurance

In the case of whole life insurance, the cash value accumulates at a rate guaranteed by your insurance provider. This guaranteed cash value, along with any accumulated dividends, forms the basis for calculating the cash surrender value.

Universal Life Insurance

Universal life insurance offers more flexibility, allowing you to adjust your premium payments. However, if you choose to decrease your premiums, the difference will be deducted from your cash value. The cash surrender value for universal life insurance is calculated by subtracting any surrender charges from the current cash value of the policy. After 10 to 15 years, surrender fees are typically waived.

Alternatives to Surrendering Your Policy

Before surrendering your life insurance policy, it's worth considering alternative options for accessing the cash value:

• Withdrawal: You can typically withdraw a portion of the cash value, but this will reduce the death benefit for your beneficiaries.
• Policy Loans: You can borrow money against your policy, using it as collateral. Interest rates are usually lower than personal loans, and no loan application or credit check is required. Any outstanding loan balance will be deducted from the death benefit.
• Use Cash Value to Pay Premiums: You may be able to use the cash value to pay your insurance premiums, making it easier to maintain coverage. However, if the cash value becomes too low, your policy may lapse.

Frequently asked questions