Q

What is a cash surrender value?

A

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

Nupur Gambhir

By

Nupur Gambhir

Nupur Gambhir

Life Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius and licensed Life, Health, and Disability agent in New York.

Updated February 22, 2021|6 min read

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If you own a cash value life insurance policy and have accrued a significant amount of cash value, you can surrender the policy and take the money. 

But depending on how long you’ve held the policy and your insurance company’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 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.

Key Takeaways

  • Your life insurance policy’s cash surrender value can be taxed

  • 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, you should speak to a financial advisor

If you own a cash value life insurance policy and have accrued a significant amount of cash value, you can surrender the policy and take the money. 

But depending on how long you’ve held the policy and your insurance company’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 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.

How the cash 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 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 receive any of the cash value. Other insurance companies charge surrender fees for canceling a policy during its 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 initial surrender fee can be a lot higher than this and the reduction period can last a lot longer. 

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 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, how much you’ve paid in premiums) can be taxed as income. That will include any interest the cash value has earned or any dividends your insurance company has paid.

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. 

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 insurance usually cost around five to 15 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 still need coverage. After you surrender your policy, you cannot get it back and your family members won’t get a life insurance payout. 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 active, provided you’ve had the policy for long enough and have accrued enough cash value. 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 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 it can also be a risky move. If you die before you pay back your loan, the amount you owe (including interest) will be deducted from your policy’s death benefit.

Learn more about cash value liquidity in life insurance policies.

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. If you end up depleting the entirety of the cash value, your policy will lapse and your beneficiaries won’t get the life insurance payout — and you won’t be able to redeem any money from the cash value.

Sell your insurance policy to a life settlement company

Older policyholders who don’t need life 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 only buy policies 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 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 receive the surrender value. But make sure to 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 policy. 

FAQ

How is cash surrender value calculated?

Your policy’s cash surrender value is calculated by deducting any fees you owe the insurer from your policy’s cash value.

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.

Should I cash out my life insurance policy?

You should only cash out your life insurance policy if you no longer need coverage. By cashing out your policy, your beneficiaries no longer receive a death benefit.

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