If you cancel a permanent life insurance policy, you’ll get to keep the total amount of any cash value that’s accumulated after you pay the associated fees. The amount you keep is called the cash surrender value.
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.
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 you’ll receive if you surrender — or cancel — the policy. This consists of the cash value minus any surrender fees you have to pay.
If you’re not sure about your particular insurance company’s surrender fee schedule, you can call it directly to confirm the 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?
Most cash value insurance policies are subject to a surrender period for the first 10 years that the policy is active. If you cancel during the surrender period, you’ll likely have to pay significant surrender fees.
If you cancel during the first few years your policy is active, the fees may be so high that you don’t get to keep any of the cash value.
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
Let’s say your policy has $5,000 in cash value and you surrender your policy in the second year. You’ll pay the 9% fee and 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. These are some of the most popular types of permanent life insurance and how their cash value works.
Whole life insurance: The cash value grows at a fixed rate set by your insurer.
Universal life insurance: You can adjust your premiums and death benefit over time. You can eventually use your cash value to pay for your premiums.
Variable life insurance: You can choose how to invest your policy’s cash value.
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?
You’ll only have to pay taxes if the surrender value is greater than the amount of premiums you paid for your policy. [1] That will include any interest the cash value earned or any dividends your insurance company paid into it. The money you receive will be treated as taxable income.
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 to claim the cash value isn’t the best way to take advantage of your life insurance. However, surrendering your policy could be good for you in the following situations:
You no longer need the life insurance policy; or
You can no longer afford the premiums.
In both of these situations, you’ll be better off without the policy and depending on how long you’ve had the policy, could get to keep much of the cash value.
If the reason you’re considering canceling your policy is that you’re having trouble making the payments, a good option for you to keep your policy active is to use the cash value to pay or reduce your premiums.
If you’re not sure if surrendering your policy is right for you, speaking with a licensed agent or financial professional can help.
Frequently asked questions
Can you cash in a life insurance policy before you die?
You can’t claim the full death benefit from your life insurance policy before you die, but you may be able to access money from your policy if it has a cash value component or living benefits.
What are the fees associated with canceling a life insurance policy?
Depending on the terms of your life insurance policy, you may need to pay a surrender fee, which can be anywhere from 10% to 40% of the cash value of the policy. You’ll also need to pay taxes if the cash value exceeds the amount of premiums you paid on the policy.
How soon can I borrow money from my life insurance policy?
You can borrow money from your life insurance policy once the policy has accumulated a cash value component. For most policies, this takes at least 10 years. And you can’t borrow more than the total cash value that’s accumulated.
Am I guaranteed any amount for my policy’s cash surrender value?
No. Not all policies have a cash value account, and any cash surrender value will be highly dependent on your individual circumstances.
