Finding Life Insurance Cash Surrender Value: A Guide

Life insurance is a valuable investment, but circumstances may arise that prompt you to reconsider your coverage. In such cases, you may want to know the cash surrender value of your life insurance policy. This refers to the sum you receive when terminating a permanent life insurance policy before its maturity or the insured event. To calculate the cash surrender value, subtract any surrender fees and outstanding debts from the total cash value of the policy. It's important to note that cancelling your policy will result in the loss of life insurance protection and may have tax implications.

How to calculate cash surrender value

The cash surrender value of a life insurance policy is the amount of money that the insurance company will pay out to the policyholder if they decide to cancel the plan. This is also known as the policyholder's equity.

To calculate the cash surrender value, you must first consider any fees your insurance company will charge for cancelling your policy. Check your policy contract, which should outline the details of the surrender value, penalties, and charges. Then, take the total cash value and subtract any surrender fees or charges. The surrender value will be less than the face value of the policy or the death benefit.

For example, if you have a variable universal life insurance policy worth $100,000 and you've made five years' worth of payments, accumulating a cash value of $10,000, but the surrender charge is 10% of the cash value, you will pay $1,000 in charges and receive $9,000 as the cash surrender value.

It's important to note that the surrender value of a life insurance policy is typically lower than its benefit value. Before surrendering your policy, consider alternatives such as withdrawing funds, taking out a loan against the policy, or using the cash value to pay your premiums.

What is cash surrender value?

Cash surrender value is the amount of money a life insurance policyholder receives if they terminate their permanent life insurance policy before it matures or before they die. This is also known as policyholder's equity.

The cash surrender value is the amount of cash built up in the policy minus any surrender charges or fees. These charges decrease over time, so the longer you have had your account, the closer the cash surrender value will be to the cash value.

In most cases, the cash surrender value will be paid in a lump sum. However, depending on the policy, it may be paid in periodic payments over time. This will be outlined in the policy contract.

It is important to note that cash surrender value is different from the policy's cash value. The cash value is the total sum in the policy's cash account before any fees or charges. The cash value grows tax-deferred, so it is not taxed as long as the money remains in the policy. However, once the cash value is withdrawn or the policy is surrendered, taxes may be owed if the surrender value exceeds the total amount paid into the policy.

How does cash surrender value work?

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 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 of cash you've built up minus any surrender charges or fees. These charges diminish over time, so the longer you've had your account, the closer the cash surrender value will be to the cash value. Surrender fees typically range between 10% to 35% of the policy's cash value and decrease each year. Most policies end the surrender charge after 10 to 15 years.

In most cases, the policy's cash surrender value will be paid in a lump sum. However, depending on the policy, it may be paid in periodic payments over time. To determine the value and how it is paid out, you must refer to your policy contract, which should outline these details.

It's important to note that cash surrender value is different from cash value. Cash value is the amount of equity in a life insurance policy, which a policyholder builds with premium payments and grows over time. The cash surrender value is the amount paid out to the policyholder upon cancellation, minus any surrender fees.

When you surrender a policy, you will receive whatever you paid in premiums back tax-free. However, if you receive more than you paid in total premiums, you may owe income tax on your earnings. Therefore, it is crucial to understand the potential tax implications before surrendering a policy.

The process of surrendering a life insurance policy typically involves submitting a "surrender request" form to the insurance provider. Once the form is submitted, the insurance company will pay out the cash surrender value, usually in the form of a cheque.

It is worth noting that surrendering a life insurance policy has consequences. By cancelling the policy, you will lose your life insurance protection, and your beneficiaries will no longer receive a death benefit when you pass away. Additionally, you may have to pay fees and surrender charges, resulting in a lower cash surrender value than the current cash value of the policy.

Before surrendering a policy, it is advisable to consider alternatives, especially if you still require life insurance coverage. Some options include making a partial withdrawal from the cash value, taking out a loan against the cash value, or using the cash value to pay insurance premiums. These alternatives allow you to access the cash value while retaining your life insurance coverage, although they may result in a reduced death benefit.

Types of life insurance with cash surrender value

Cash surrender value is the amount of money a life insurance policyholder receives when they cancel their policy before it matures or before they pass away. This cash value is the savings component of most permanent life insurance policies. Permanent life insurance offers cash surrender value if you cash in your policy before the maturity date; term life insurance policies do not.

Not all types of life insurance come with a cash surrender value. Here are some types that do:

Whole Life Insurance

Whole life insurance is a permanent life policy that offers coverage for your entire life. It has a guaranteed death benefit and cash value component that accumulates interest over time. Whole life insurance might make sense if you’re a high earner or have long-term financial obligations.

Universal Life Insurance

Universal life insurance is a type of flexible permanent life policy. It can allow you to increase or decrease your premium payments. If you decide to decrease the amount you spend on premiums, you can expect the difference to be withdrawn from your cash value.

Variable Universal Life Insurance

Universal 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.

Indexed Universal Life Insurance

The cash value of indexed universal life insurance policies is tied to an index, like the S&P 500. Your cash value will increase or decrease based on the performance of the indexes. These policies typically have minimum guaranteed returns and a cap on maximum returns.

Alternatives to surrendering your life insurance policy

Before surrendering your life insurance policy, it is important to explore alternative options that could better suit your needs. Here are some alternatives to consider:

• Partial Surrender: Depending on the contractual terms of your policy, you may be able to withdraw a portion of the cash value while maintaining some death benefit coverage. This option allows you to access funds while keeping the policy partially intact.
• Reduce Policy Coverage: If you are struggling with premium payments, consider reducing the policy's death benefit coverage. This can result in more affordable premiums, allowing you to keep the policy in force.
• Policy Exchange: In some cases, you may be able to exchange your current policy for another that better aligns with your needs. For example, a 1035 exchange allows you to transfer funds from one policy to another without incurring taxes.
• Premium Financing: If you have a high-value policy, borrowing money to cover premium payments may be an option. This can be beneficial for estate planning purposes, but be sure to evaluate the cost of the loan, including interest rates and the potential impact on policy funding.
• Convert to a Paid-Up Policy: Depending on the type of permanent life insurance policy you own, you may be able to convert it into a paid-up policy. This means you stop making premium payments, and the policy remains in force but with a reduced death benefit.
• Sell Your Policy (Life Settlement): For policyholders with lower life expectancies or changing insurance needs, selling your policy to a third party for a lump sum may be an option. The buyer assumes responsibility for future premium payments and receives the death benefit when you pass away.
• Accelerated Death Benefit: If you have a terminal illness or meet certain criteria, some policies offer an accelerated death benefit rider. This allows you to access a portion of the death benefit early.
• Gifting the Policy: If you no longer need the policy and want to support a charitable cause, consider gifting it to a nonprofit organization. This can provide tax benefits while also making a substantial donation.
• Borrowing Against Cash Value: Permanent life insurance policies often allow you to borrow against the policy's cash value at low-interest rates. This gives you access to cash while keeping the policy intact. However, interest accumulates on the outstanding loan balance, and your policy could lapse if the loan balance exceeds the remaining cash value.
• Withdrawing from Cash Value: Withdrawing from your cash value allows you to access funds without taking out a loan or surrendering your policy. However, withdrawals may trigger tax consequences and reduce your death benefit.
• Using Cash Value to Pay Premiums: Some permanent life insurance policies let you pay premiums with your cash value. This can help reduce your out-of-pocket costs while maintaining full coverage. However, if you deplete your cash value, your policy could lapse.

Frequently asked questions