Cash Surrender Value For Life Insurance: Helpful Tips (Updated)

Cash surrender value

It’s vital to comprehend the cash surrender value if you have a life insurance or annuity policy. If you decide to cancel your policy, you can expect to get this amount of money. We shall define the cash surrender value and describe how it operates in this piece. We will also go over situations in which it may be wise to terminate your policy and get your cash surrender value.

What Is Cash Surrender Value?

If a policyholder or the owner of an annuity contract chooses to cancel their policy before it matures or an insured event occurs, the insurance company will give them the cash surrender value as compensation. Most permanent life insurance policies, especially whole life insurance policies, use this cash value as their savings component. It also goes by the name “policyholder’s equity.”

Understanding Cash Surrender Value

The savings component of whole life insurance policies payable before death is subject to cash surrender value. The savings component of a whole life insurance policy, however, offers very little return in the early years relative to the premiums paid.

The accumulated sum of a permanent life insurance policy’s cash value that is made available to the policyholder upon surrendering the policy is known as the “cash surrender value.” The cash surrender value can be lower than the real cash value depending on the age of the policy.

Reduction of Charges and Benefits

Companies offering life insurance may deduct fees on cash surrenders made in the early years of a policy. Depending on the type of policy, the policyholder may have access to the cash value at any time. It is, however, important to remember that giving up some of the cash value lowers the death benefit.

Also, depending on the annuity’s age, fees may be incurred for both partial and complete surrenders. Meanwhile, taxes are postponed until surrender, after which, depending on the annuitant’s age, a further premature withdrawal penalty can be imposed.

Cash Value vs. Cash Surrender Value

The cash value is typically guaranteed in whole life insurance plans, but it can only be withdrawn when the policy is canceled. Also, a portion of a policyholder’s cash value may be withdrawn or borrowed for immediate use.

Furthermore, the cash value of insurance may be used as security for low-interest policy loans. The amount of the outstanding loan is deducted from the policy’s death benefit if it is not returned. And unless the insurance is surrendered, loans are tax-free; nevertheless, the amount of any outstanding loans that are cash-value earnings are subject to taxation.

How Is Cash Surrender Value Calculated?

As you can tell already, there is a difference between the cash value and the surrender value. You must take into account any costs your firm may impose for withdrawing your funds when calculating your cash surrender value.

Also, you must total up all of your insurance payments in order to calculate how much money you will receive in a cash surrender, then deduct any fees and potential penalty withdrawal charges.

Take out a $100,000 whole life insurance policy, for instance. You accrue a cash value of $10,000 over the course of ten years of payments. You will be charged 30% of the cash value for the surrender change. Charges will cost you $3,000, and the cash surrender will only net you $7,000 in total. the positive news Since the cash surrender is seen as a return of premiums to your account and is therefore not taxable, you most likely won’t have to pay taxes on it.

Don’t overestimate your surrender or cash value because it does not correspond to the amount of death benefit coverage you have purchased. As a benefit to help offset the increase in premiums as you age, a cash value is linked to the policy and gives policyholders access to money they can borrow.

Top Considerations

The cash value of universal life insurance plans is not guaranteed. After the first year, though, it can be partially given up. The cash values of a universal life plan normally include a surrender term during which they may be given up, but a surrender charge of up to 10% may be imposed. When the surrender time expires, which typically occurs after seven to ten years, there is no surrender charge. Taxes on the portions of the surrendered cash values that represent cash value earnings are the responsibility of the policyholders.

In either scenario, the policy must still have enough cash value to support the death benefit. Loans are not regarded as cash surrenders under whole life insurance plans, so the amount of cash value is unaffected. The cash values of universal life insurance plans are not certain. The policyholder must reinvest enough funds in the policy to keep it from lapsing if cash value growth falls below the minimum rate of growth required to maintain the death benefit.

Should You Purchase a Cash Value Policy?

Depending on your unique financial circumstances, it might be a wise decision if you have maxed out your retirement account contributions, have an emergency fund set aside, and can pay the monthly premiums for whole or universal life insurance with a cash value benefit. These accounts are not advised as a vehicle for investment if you are struggling to save for retirement and cannot afford a lifetime of high premiums.

Can you still keep the policy and use the cash value?

It is often possible to pay your premiums from the cash value in your account. You maintain coverage for your beneficiaries in this way. Additionally, while keeping the policy, you can take out loans based on your cash value. Your death benefit can be lessened if you choose to cash out the value.

Exactly how is the cash surrender value determined?

When you want to cancel your insurance, the surrender value will vary depending on how much cash value you have and whether there is a surrender penalty. Your policy will outline the length of the surrender period and the formula used to determine surrender charges, which are determined by your age, gender, rating class, and level of coverage.

The fine, which may be based on a percentage, usually goes down every year until the insurance is “out of surrender,” at which point it goes away entirely. Surrender fees might be particularly high during the first few years of the contract. If you have any cash value built up, for instance, your surrender value during the first insurance year could be 0% of the cash value. However, it can be closer to 80% of the cash value amount in the fifth year. It depends on the particulars of your coverage and isn’t always an easy calculation.

It may be worth waiting until the policy is out of the surrender period or almost out of the surrender period, or accessing the cash value via a loan or direct withdrawal if you want to cancel a policy during the surrender period. Ask your insurer what the cash surrender value is to know how much of a hit you’ll take in surrender fees.

The cash surrender value of a policy is not constant; rather, it often rises over time as the cash value of the policy rises and the surrender fees fall.

Tax and Other Consequences

The IRS may classify a portion of the proceeds from a life insurance payout as taxable income. If you need to determine your taxable income, simply subtract the entire amount of premiums you paid from the amount of cash obtained from the cash surrender. For instance, $10,000 would be taxable if you received a cash surrender payment of $50,000 and contributed $40,000 in premium payments.

Meanwhile, it’s crucial to understand that cashing out your insurance cancels it, aside from any potential taxation. There is no grace period during which you will still be covered once you surrender your insurance, and you cannot change your mind after that. No death benefit will be paid to beneficiaries, and depending on your age and health, it can be challenging or impossible for you to obtain a new life insurance policy.

When you applied for your current coverage, the premium was determined by your age and health. If you want to replace it with a comparable policy, the cost will be significantly higher, or you might not be able to get insurance at all, particularly if you’ve developed health problems.

The Function of Cash Surrender Value

There are several reasons why life insurance plans are canceled. They frequently cancel since they no longer require insurance.

If you are the owner, you can often surrender your policy by simply completing a “surrender request” form and sending it to your insurer. You can anticipate getting a payment from the insurance company after submitting the paperwork.

Instead of surrendering the entire policy, you might ask for a partial surrender, a cash withdrawal, or take out a loan against the cash value. However, you should discuss how these might impact your policy with your insurer.

Options Rather Than Giving Up Your Policy

It’s smart to keep your life insurance rather than cancel it if you still require it. Additionally, there are ways to obtain your policy’s cash value while maintaining your coverage.

Use the cash value to pay premiums:

If you’re having trouble making premium payments, your policy may have a clause that allows it to deduct unpaid premiums from your cash value. Alternately, you might be able to choose a “reduced paid-up” option, which substitutes a smaller death benefit for your policy’s cash value but does not necessitate extra payments from you.

Make a withdrawal:

Rather than taking the whole face value of your life insurance policy, you can withdraw from its cash value. You shouldn’t be required to pay income tax if the amount you withdraw is less than the amount you paid in premiums.
Consider taking out a loan against the cash worth of your policy if you are in the surrender term for it. You must pay back the loan with interest if you don’t want your death benefit to be reduced. However, there won’t be any surrender charges.

Exchange your policy:

By using a 1035 swap, you can exchange your life insurance policy for either long-term care insurance or an annuity without having to pay taxes on any gain.
Use an accelerated death benefit (ADB) provision if your policy has one. If you have a chronic or terminal illness or need long-term care, you may be able to obtain a portion of the death benefit “early” if your policy has an ADB provision.

Sell your insurance:

In order to collect more than the cash value of your policy, you may opt to sell it in a life or a viatical settlement if you are over 65 or terminally sick. When you sell a policy, the settlement company takes ownership of it and becomes the beneficiary, paying any future premiums and collecting the payout in the event of your death.
You shouldn’t be required to pay tax on any gains if you sell your policy to a settlement firm when you’re terminally sick.

Speak with your insurer before canceling your coverage or making any other significant changes to it. A representative can provide you with the precise cash surrender value as well as details and examples that demonstrate how long your policy will last if you stop making premium payments or make a withdrawal. Additionally, they can go over the effects of taking out a loan or whether you can use the ADB clause in your policy.


Only a select few types of life insurance, such as whole and universal life, even include a cash value component. The transaction will come to a conclusion whenever you surrender your life insurance policy’s cash value. Your policy remains in effect if you borrow against the cash value. If you surrender your policy, you will forfeit the cash benefit and probably incur penalties and other costs, particularly if your insurance is not very old and has little equity. Additionally, your designated beneficiaries will be impacted if you surrender your life insurance policy.

Although the cash value of whole life insurance is guaranteed, you can only surrender it when you terminate your policy. After the first year of carrying the policy, universal life insurance typically offers more flexibility with its cash value, allowing policyholders to partially surrender the cash. In general, if you surrender your policy in order to access its cash value, you will instead receive its surrender value, which is almost certainly going to be far less than the full policy value.

Cash Surrender Value For Life Insurance FAQs

Is surrender value the same as cash value?

Consider the distinction between the cash value and surrender value of the policy: The cash value of an insurance policy is the amount of money that accrues interest over time due to premium payments. The surrender value is the amount of money a policyholder receives upon policy termination or cashing out.

Is a cash surrender value an asset?

The cash surrender value of a life insurance policy is a controllable asset, so it must be recorded on the company’s balance sheet. Future death benefits are economic benefits that the company cannot control; therefore, they should not be recorded as assets.

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The cash surrender value of a life insurance policy is a controllable asset, so it must be recorded on the company's balance sheet. Future death benefits are economic benefits that the company cannot control; therefore, they should not be recorded as assets.

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