What Is Cash Surrender Value Of Life Insurance?

Cash surrender value

Cash surrender value is an amount you receives from an insurer when you decide to cancel your life insurance policy. It is equal to cash value amount minus surrender fee and outstanding loans if any. In most cases, the surrender fee diminishes over time and it goes away after some years, typically 10-15 years.

Note: Only permanent life provides you with cash surrender value. Term life insurance doesn't guarantee cash surrender value.

How cash surrender value works?

When you decides to terminate or cancel your life insurance policy your insurance provider pays you a cash surrender value which is equal to amount of cash value generated in your account minus the surrender fee and any outstanding loan. The payment can be in a lump sum or periodically depending on what has been detailed in your contract.

How cash surrender value is calculated?

The cash surrender value amount you receive after cancelling the policy depends on the amount of cash value generated in your account, the surrender fee charges and any outstanding balance. Thus, to calculate your cash surrender value, you have to subtract the surrender fees and the outstanding loan from the cash value generated in your account. To know the surrender fees, you have to review your life insurance contract.

Cash surrender value vs. cash value

Cash surrender value is an amount you receive if you cancel your life insurance policy, which is equal to cash value minus surrender fees and any other changes. While cash value is an amount which is generated alongside your life insurance policy apart from the death benefit.

How cash value is generated?

In every premium you pay, the portion is deposited to a saving account known as cash value and the rest amount is allocated to death benefit and other insurance costs. 

In whole life insurance, cash value grows at the guaranteed rate while in universal life insurance cash value grows basing on current interest rates. The growth of cash value is usually not taxed.

How cash value is accessed?

There are different ways you can use to access the cash value generated in your account while you are still alive. You can take a loan, withdraw or use it to pay your premiums.

• Withdrawing; Usually, the withdrawal is not taxed unless the amount you withdraw exceeds the total amount of premiums you have paid. 
• Pay premiums; You can use cash value to pay your premiums, whether a part or all of your premiums.
• Take a loan; You can take a loan against your policy. In this case, an insurer use your policy as collateral. Typically, the interest in this loan is lower than in a personal loan.

Note: Accessing your cash value affects your future death benefit.