The cash surrender value of life insurance is the current cash value minus any outstanding loans, administrative fees, and surrender fees listed in your policy. This feature is available to you if you own a life insurance policy with a cash value savings component.
You can cancel your coverage (known as a policy surrender) and take your cash value earnings.
Canceling a cash value life insurance policy can be complicated, especially if you haven’t had your policy for very long. Here’s how to decide whether to cash out your policy and what to know about taxes and fees before a surrender.
Key takeaways
Interest gains from your cash value account can be taxed after a surrender.
Alternatives to surrendering your policy for money include withdrawing from the cash value or taking out a loan against your policy.
Before you surrender your policy, it's best to get advice from a financial advisor if you can.
How to calculate cash surrender value
You can calculate your cash surrender value by subtracting any fees or taxes from your cash value amount.
The cash value is the component of a life insurance policy that functions as a tax-deferred savings account. Every time you pay a premium, a portion goes toward maintaining the policy and a portion goes toward the cash value. It typically takes at least five to 10 years to accumulate a significant cash value.
The cash surrender value is how much the policyholder receives if they were to surrender — or cancel — their insurance policy. This consists of the cash value minus any surrender fees implemented by the insurance company.
If you’re not sure about your particular insurance company’s surrender fee schedule, you can call them for more details. If you purchased your cash value insurance policy through Policygenius, you can call us for advice, too.
How does the cash surrender value of life insurance work?
Every cash value life insurance policy has a surrender period that usually lasts for the first several years that you own the policy, and often up to a decade. If you cancel your policy during the surrender period, you’ll generally be subjected to penalties, which will cut into your cash surrender value.
With some insurers, canceling your policy during the first two or three years of the surrender period means that you won’t keep any of the cash value. Other insurance companies charge surrender fees for canceling a policy during the surrender period.
Insurers often reduce surrender charges by a percentage each year over the first decade. For example, if your policy’s surrender charge is 10% in the first year of owning the policy, it might be 9% in the second year, 8% in the third, and so on, until it reaches 0%.
Example of life insurance cash surrender value
Using the above scenario, if you have $5,000 in cash value and surrender your policy in the second year, you’ll pay the 9% fee, and you’ll receive $4,550 in total cash surrender value.
The longer you’ve had your life insurance policy, the greater the final cash surrender value will be.
Which types of life insurance policies have a cash surrender value?
Any permanent life insurance policy with a cash value component has a cash surrender value. Two of the most popular types of permanent life insurance include:
Whole life insurance, a permanent life insurance policy with a cash value that grows at a fixed rate set by your insurer
Universal life insurance, a type of permanent life insurance that allows you to adjust your premiums and death benefit over time. You can eventually use your cash value to pay for your premiums.
Term life insurance policies don’t have a cash value component, therefore they don’t have a cash surrender value, either.
Is the cash surrender value of life insurance taxable?
The cash value of a permanent life insurance policy is tax-deferred, meaning that you don’t pay any taxes on the cash value until you collect your earnings.
When you cancel the policy and take the surrender value, any amount over your cost basis is taxable income. [1] That will include any interest the cash value earned or any dividends your insurance company paid into it.
Calculating how much of the cash surrender value will be taxed is fairly simple:
The difference between the cash value of your policy and how much you have paid in premiums is the cash surrender value that will be taxed.
If you have an active cash value policy, you can call your insurance provider and they can help you determine your surrender value.
→ Read more about life insurance and taxes
Is surrendering your life insurance policy worth it?
Surrendering your policy may be worth it if you’ve been making premium payments for at least 10 or so years — long enough as to where you wouldn’t have to pay a surrender fee. It could also be worth it if you don’t have a need for a permanent life insurance policy anymore.
If you no longer need life insurance — or if you simply can’t afford to continue making high premium payments on a cash value policy — it might make sense to cancel your policy and take the surrender value.
If you’re not sure if surrendering your policy is right for you, speaking with a licensed agent or financial professional can help.
Alternatives to surrendering a life insurance policy
If you’re considering surrendering your life insurance policy, you can consider alternatives like dipping into your cash value or reducing your coverage first. The best solution for you will depend on your reasons for surrendering your policy.
Pay your premiums with the cash value: Some cash value policies, like universal life insurance, let you use the cash value to pay your premiums. You'll need to keep track of your cash value because if you use all of the money, your policy will lapse.
Withdraw from the cash value: You can withdraw or take a loan out on your cash value if you need to liquidate some cash. Your death benefit is reduced by the amount you withdraw until it's repaid, meaning that your beneficiaries would get less money if you died before paying it back, but you'll keep your policy active.
Reduce your coverage amount: Most life insurance companies will allow you to reduce your coverage while your policy is active. This would decrease the death benefit for your beneficiaries, but would lower your premiums as well.
Managing — or deciding to cancel — a cash value policy can be complicated. Before you finalize your decision, talk to a financial advisor or life insurance agent who can walk you through the process and help you make the best decision for your needs.
Do you need a life insurance policy with a cash surrender value?
If your primary goal of life insurance is to provide a financial safety net for your family, replace lost income, or cover debts (like a mortgage) if you were to die, you likely don’t need a life insurance policy you can surrender for cash. You might want to consider a term life insurance policy instead.
Term life is one of the most affordable life insurance coverage options on the market, only lasts for a set term, and comes with few rules and tax restrictions. It’s the best option for most people looking to protect their income and provide their family with a financial safety net to cover any debts.
Cash value life insurance is expensive — for instance, a $500,000 whole life policy with a cash value can cost around $498 per month for a 35-year-old woman. By contrast, a $500,000, 20-year term life insurance policy for the same individual would only cost about $36 per month, according to average rates using Policygenius price data.
Without paying for high premiums, a term life policy can help you increase cash flow while still maintaining financial security for your family during your peak earning years.
On the other hand, if you have more complex estate planning needs, lifelong dependents, or you’re already maximizing contributions to other tax-advantaged accounts, a cash value life insurance policy might benefit you.
If you’re not sure which type of life insurance is best for you, a Policygenius expert can help you compare options from top insurers for free.
Frequently asked questions
How do you calculate the cash surrender value of a life insurance policy?
Calculate your policy’s cash surrender value by deducting any fees you owe the insurer from your policy’s cash value. Your insurer can share the exact fee amount.
What's the difference between cash value and surrender value?
The surrender value is the amount you keep after canceling your policy, which is equal to your cash value minus fees and any outstanding policy loans.
Is cash surrender value taxable?
Yes. Any money you receive that is over your policy’s cost basis can be taxed as income. The cost basis is the amount you paid toward your policy premiums. Interest or dividends earned on the cash value can also be taxed.
Can you sell your life insurance policy?
In some circumstances, you can sell your life insurance policy to a life insurance settlement company in exchange for cash. This is called a life settlement, or viatical settlement. Selling your policy is rarely advisable because of high fees and commissions to third parties.
