Q

What is cash surrender value?

A

Cash surrender value is the amount of money you’ll receive when you cancel a cash value life insurance policy. The surrender value is usually equal to the policy’s cash value, minus any outstanding loans and fees you owe your insurer.

Jennifer Pan

Jennifer Pan

Published January 6, 2020

KEY TAKEAWAYS

  • When you cancel a cash value life insurance policy, you may be able to collect the cash surrender value, which is the cash value minus any debts and fees you owe your insurer

  • If you cancel your policy during its surrender period, you may have to pay steep surrender charges or you might not get any of the cash value

  • Surrendering your policy means losing your life insurance coverage, so it’s a good idea to talk to a financial advisor or insurance agent before cashing out your policy

If you own a cash value life insurance policy, such as whole life insurance, and decide you no longer need life insurance coverage, you can surrender the policy and take the cash value.

But depending on how long you’ve held the policy and your insurance carrier’s fees, you may not be able to collect the entirety of the cash value. The final amount of money that you receive when you surrender a cash value life insurance policy is called the cash surrender value (or just the surrender value). The surrender value is typically the current cash value of your policy minus any outstanding loans, administrative fees, and surrender fees listed in your policy.

Because canceling a cash value life insurance policy can be complicated, here’s what you should know before you decide to surrender your policy and take the cash.

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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, and sometimes for more than a decade. While the exact length and the rules of the surrender period will vary from insurer to insurer, if you cancel your policy during the surrender period, you’ll generally be subject 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 receive any of the cash value. Other carriers charge surrender fees of up to 10 to 12% for canceling a policy during its surrender period.

Carriers often reduce surrender charges by a percentage each year over the first decade. So 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. This means that the longer you’ve had your life insurance policy, the greater the final surrender value will be.

How the 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 as it grows over time.

However, when you cancel the policy and receive the surrender value, any money you receive over your cost basis (that is, the part of your cash value that’s drawn from your premiums) can be taxed as income. That will include any interest the cash value has earned, or any dividends your insurance company has paid.

Read more about life insurance and taxes.

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Alternatives to surrendering a life insurance policy

Cash value life insurance policies such as whole life usually cost around 6 to 10 times more than term life insurance. According to one estimate, about 45% of whole life insurance policies are surrendered within 10 years due to the high cost of premiums.

Because canceling your policy means that you’ll lose your life insurance coverage, it should be a last resort. If you have a cash value policy that you’re thinking of surrendering, you may want to consider the following options first:

Withdraw money from the cash value or take out a loan

One of the benefits of owning a cash value policy is that you can withdraw money from the cash value while still keeping your policy in force, provided you’ve had the policy for long enough. Any money you withdraw from the cash value will be tax-free up to the cost basis. And though your death benefit will be reduced by whatever amount you withdraw, you’ll still have some life insurance coverage.

You can also choose to take out a loan against your policy. Life insurance policies often offer lower interest rates than you’d get elsewhere, so borrowing against your policy can make sense financially in some cases. But keep in mind that if you die before you pay back your loan, the amount you owe (including interest) will be deducted from your death benefit.

Use the cash value to pay your premiums

Some types of cash value life insurance, such as universal life insurance, allow you to use the cash value to pay your premiums. If you’re struggling to make your payments and you can get a few months (or more) of relief from paying for the policy, you can use this option to keep your policy active.

However, you’ll need to keep track of how much of your cash value you’ve put toward your premiums, because if you end up depleting the entirety of the cash value, your policy will lapse and you won’t receive any surrender value.

Sell your insurance policy to a life settlement company

Older policyholders who don’t need insurance anymore can sometimes get more cash by selling their unwanted cash value policy to a life settlement company rather than surrendering it to the insurer. When a life settlement company purchases your policy, they take over your premium payments and collect the death benefit when you die.

Most life settlement companies will pay more than the surrender value for your policy but less than the total death benefit. They typically buy policies only from people over the age of 65.

Learn more about the pros and cons of selling your life insurance.

When to surrender your life insurance policy

You most likely purchased life insurance to provide some financial protection for your dependents in the event of your death. But circumstances can change: Maybe you don’t have dependents anymore, or you’ve realized you can get by with a much cheaper term life insurance plan. Or maybe your wealth has increased substantially and you’re now self-insured.

If you know 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 receive the surrender value. But make sure you talk to a financial advisor or life insurance agent who can walk you through the process and advise you on the consequences of surrendering your life insurance.