If you own a life insurance policy with a cash value savings feature, you can cancel your coverage (known as a policy surrender) and take your cash value earnings. The cash surrender value is the current cash value minus any outstanding loans, administrative fees, and surrender fees listed in your policy.
Canceling a cash value life insurance policy can be complicated. Here’s how to decide whether to cash out your policy and what to know about taxes and fees before a surrender.
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, get advice from a financial advisor.
How the surrender period and surrender charges work
Every cash value life insurance policy has a surrender period that usually lasts for the first several years that you own the policy, often up to a decade. If you cancel your policy during the surrender period, you’ll generally be subjected to steep penalties.
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%.
The longer you’ve had your life insurance policy, the greater the final cash surrender value will be.
How the cash surrender value is taxed
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 (that is, how much you’ve paid in premiums) is taxable income. 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. Your insurance company can help you do the math.
When to surrender your life insurance policy
You most likely bought life insurance to give your family some financial protection. But circumstances can change. Maybe you don’t have dependents anymore, or your wealth has increased substantially and you no longer need life insurance coverage.
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 makes sense to cancel your policy and take the surrender value.
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Alternatives to surrendering a life insurance policy
Because canceling your policy means that you’ll lose your life insurance coverage, it should be a last resort. After you surrender your policy, you can't get it back and your family members won’t get a life insurance payout. It's worth considering alternatives like dipping into your cash value, depending 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. But you'll need to keep track of your cash value: 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, but you'll keep your coverage.
Sell your life insurance policy: Life settlement companies sometimes ask older or critically ill policyholders to sell their policies for cash rather than surrendering them. The complexity and high fees of a life settlement usually aren't worth the payout.
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.
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.