Life insurance is a valuable tool, but there may be occasions when you wish you could cancel your policy and receive a refund. Fortunately, some (but not all) insurance policies allow you to do so. For the most part, whole life insurance, permanent life insurance, variable life insurance, and universal life insurance all have cash value components. This means that you can get some money back if you cancel your policy. However, a cash value option is not available with term life insurance. But just so you fully understand what we are driving at, let’s begin with the basics. Essentially, it’s crucial to know what the cash surrender value of life insurance is and how it’s calculated before surrendering your policy to have access to its cash surrender value.
But as I earlier mentioned, let’s start with the basics…
What Is Cash Surrender Value?
In simple terms, if a policyholder or annuity contract owner voluntarily terminates their policy before maturity or an insured event happens, the insurance provider pays them what is known as a cash surrender value. Most permanent life insurance policies, particularly whole life insurance policies, have this cash value as a savings component. It’s also referred to as policyholders’ equity.
Basically, the cash surrender value of your policy is the amount of money you can get if you cancel it. It’s vital to keep in mind that this figure may differ from the price you paid for your coverage. The cash surrender value will, in most situations, be less than the premiums you have paid.
How Does it Work?
The cash surrender value is usually given in one lump sum to the policyholder. Some policies, on the other hand, may allow for recurring payments over a period of time. The amount you get will be determined by your policy’s terms and conditions.
The insurance provider will pay you the cash surrender value if you cancel your coverage. However, this sum may be taxed, therefore you’ll need to talk to a tax professional to figure out how much of it is.
In the majority of cases, the insurance company will also reimburse any premiums you have paid.
Meanwhile, it’s worth noting that the cash surrender value isn’t always the best option. You should speak with an insurance agent or a financial counselor to see if canceling your coverage and receiving the cash surrender value is a wise choice.
Cash Surrender Value Examples
You must first grasp what “cash value” is and what surrender costs are in order to better appreciate “cash surrender value.”
Term life and permanent life insurance policies are the two types of life insurance policies available. Term life insurance policies are only good for a set number of years, such as 20, and only payout if the insured dies during that time. Permanent life insurance, on the other hand, is designed to last your entire life and, as a result, creates a cash value within the policy. This financial worth can also be used as a form of savings.
The cash value of a policy is not the same as the amount of coverage or the death benefit. It’s a cash account built into the policy to help offset the rising cost of coverage as you become older.
Permanent insurance contracts have a “surrender term” that can run up to ten years. If you opt to surrender (cancel) the policy within this time, the insurer will charge you a penalty according to the policy’s surrender fee schedule.
In a permanent life insurance policy, the “cash surrender value” is the cash value minus any applicable surrender charges.
Mathematically; Cash Surrender Value = Cash Value – Surrender Charges
How Is It Calculated?
When you want to cancel your policy, the surrender value is determined by how much cash value you have and whether or not there is a surrender penalty. Your policy specifies the length of the surrender term and how surrender charges are computed, which are dependent on your age, gender, rating class, and the amount of coverage you have.
The penalty may be calculated as a percentage, and it usually reduces each year until the policy is “out of surrender,” at which point it becomes zero. Surrender charges can be particularly high in the first few years of a contract.
If you have any cash value built up during the first insurance year, for example, your surrender value might be 0% of the cash value. However, by the fifth year, it may be closer to 80% of the cash value. It is dependent on the terms of your insurance and is not always a simple estimate.
Meanwhile, if you want to cancel a policy during the surrender term, find out what the cash surrender value is to see how much you’ll lose in surrender fees. It might be worth waiting until the policy is out of the surrender period or getting the cash value through a loan or direct withdrawal.
The cash surrender value of a policy isn’t set in stone; it normally rises over time as the policy’s cash value rises and the surrender charges fall.
Implications for Taxes and Other Matters
The IRS may consider a portion of the money received from a life insurance policy to be taxable income. Subtract the total amount you paid in premiums from the amount you received in the cash surrender to arrive at your taxable income. For example, if you receive a $70,000 cash surrender payout and paid $60,000 in premium payments, you will owe $10,000 in taxes.
Aside from the possibility of taxation, it’s important to note that cashing out your insurance cancels it. You cannot alter your mind after surrendering your policy, and there is no grace period during which you will be covered. Beneficiaries will not receive a death benefit from the policy, and getting a new life insurance policy may be difficult, if not impossible, depending on your age and health.
The Difference Between the Cash Value and the Cash Surrender Value
As you pay premiums, the cash worth of your insurance policy (or annuity) grows, and interest is credited to the account value. If you need to spend all of your cash value at once, you have two options: borrow against it (and pay interest on the loan) or cash out completely.
You “surrender” the policy or annuity when you cash out, which may result in surrender charges. Your “cash surrender value” is the difference between the cash value and the surrender costs.
If you’ve kept the product long enough, the cash value and cash surrender value can be the same, but costs sometimes cause them to differ. If you no longer need your policy but want to use the money, you should calculate the surrender fees. Long-term life insurance policies are designed to be held.
In addition, the surrender value of insurance plans and annuities differs slightly:
Permanent Life insurance — You have three options for accessing your cash value: (1) borrowing against the insurance (with interest), (2) withdrawing some of your money, or (3) canceling the policy and receiving the surrender value.
Annuities— Getting your annuity’s cash value may incur different fees depending on how long you’ve had it. . The surrender value of an annuity is the sum of your payments, plus any investment gains or interest, less any earlier withdrawals or outstanding loans.
What Are the Different Types of Life Insurance Policies That Have Cash Surrender Values?
Permanent life insurance, unlike term life insurance, has a cash value that you can access through policy withdrawals and loans. Consider the following scenario:
Universal Life Insurance
Life insurance policies that are universal do not have an expiration date (as long as you pay required premiums and meet other conditions). They also have premiums that are variable and death benefits (the amount beneficiaries receive if you die). Their cash values accrue interest at market rates or at a specified minimum rate, and you may be able to access some of that cash value without reducing the policy’s original death benefit (also known as “face value”).
Whole Life Insurance
This type of coverage can also cover you for the rest of your life, but the premiums are set. Your cash value should increase as you make payments. You will obtain your cash surrender value if you want to access your complete cash value and terminate your policy. Of course, that would defeat the purpose of getting life insurance in the first place; to assist protect the futures of your loved ones if you died.
Do You Require a Cash-Value Policy?
Over time, the value of your cash grows, boosting your net worth and financial security. Nonetheless, the expenses of the policy might diminish your returns, and the amount of risk you assume depends on the type of policy you purchase.
Most people can get by with term life insurance, which pays out a death benefit but expires after a specified length of time and doesn’t grow in value. Consider a permanent life policy if you’ve maxed out your retirement savings, met all of your other financial needs, and want coverage and other advantages in the long run.
What Factors Go Into Determining the Cash Surrender Value?
The cash surrender value of a life insurance policy can be calculated in a few different ways, depending on the policy type.
Basically, the value of the investment fluctuates with the sub-accounts in which it is invested in variable life plans. The value of a whole life coverage grows at a rate set by the insurance company. The value of universal life policies grows at the industry standard rate. The following delves deeper into how cash surrender value is calculated.
Account Duration
The account duration is the most important factor in cash value since it shows both how long you’ve been paying into it and how long your investment has had to grow.
Amount Paid
The investment capital in the cash value component of your life insurance policy is made up of a percentage of your premiums. As a result, the higher your payment, the greater your investment.
Market Performance
If your investment is linked to the market, market performance becomes the most important element. When the market is performing well, your investment may perform well as well.
Meanwhile, you must first complete the surrender term before receiving your cash surrender value. Before you can receive the cash value of your policy, you must wait a certain amount of time. The length of the waiting time is regulated by the policy type and the insurance company.
What Are Surrender Fees, and How Do They Work?
When you collect the cash surrender value of your life insurance policy, most firms levy surrender fees. These fees are typically higher for newer plans and diminish over time. Surrender fees differ significantly between plans and depend on the age or duration of the policy. Surrender costs, on the other hand, are commonly seen in the 10% to 35% range.
Take, for example, a twelve-year-old life insurance policy with a cash value of $7,000 in it. You make the decision to sell your policy for the cash value. You receive $5,600 after your insurance company deducts a 20% surrender charge, and the firm keeps $1,400 in costs. The cash surrender value is the amount you receive, while the initial amount is the base cash value.
You should be aware that a percentage of the cash surrender value of life insurance may be taxed as I earlier mentioned. Contact your insurance company, your agent, or an accountant if you have any questions about the tax rules that apply to your life insurance policy and its cash surrender value.
Is It Worth It to Cancel Your Policy?
It may be worthwhile to surrender your coverage, depending on your circumstances. If you plan to switch to a different life insurance policy, especially one with a different company, surrendering your current policy may make sense.
If you change employment and your new job offers free or subsidized life insurance, this could be a good moment to surrender your policy. Of course, if you are in desperate need of cash and have no other options, you can surrender your policy. However, this ultimate motive should only be used as a last resort. Taking out a personal loan may make more sense in this circumstance. You could even be able to use your life insurance policy as collateral for a loan.
Surrendering your insurance policy isn’t always the best option. You are unlikely to be reimbursed for all of the premiums you have paid throughout the years. A refund is not a cash surrender value. It is just the return of your investment, net of any gains or losses.
FAQs
What is cash surrender value example?
Assume you buy a $100,000 whole life insurance policy with a $200,000 death payout. After ten years of steady, on-time payments, the policy has a cash value of $10,000. You check your insurance policy and discover that the surrender price after ten years is 35 percent.
How do you calculate cash surrender value?
To calculate your cash surrender value, subtract any surrender fees and charges charged by the life insurance company from the total cash value (premiums you’ve paid minus death benefit premiums).
Is surrender value the same as cash value?
The cash value of your policy is the amount of money you have in it that earns interest over time as a result of premium payments. Surrender value is the amount of money received by a policyholder when the policy is terminated or cashed out.
