Cash Surrender Value vs. Cash Value: Key Differences Explained

What Is Cash Surrender Value?

Cash surrender value is the money you receive when you cancel a life insurance policy early. This cash value is the savings part of most permanent life insurance policies like whole and universal life. It is also known as policyholder's equity. The insurance company might charge a fee, called a surrender charge, before paying out the cash value.

How Cash Surrender Value Works

As you pay premiums, some permanent life insurance policies  increase in cash value. This is money you could take out while still alive. If you cancel your life insurance policy, known as a surrender, the insurance company will send you a check for your cash value.

Cash value growth is guaranteed with a whole life policy. In the early years of a whole life insurance policy, the savings return is low compared to the premiums. As time goes by, you build more cash value which increases your cash surrender value.

When you surrender a policy, you receive whatever you paid in premiums back tax-free. If you receive more than you paid in total premiums, you owe income tax on your earnings.

Comparing Cash Surrender Value and Cash Value

In the policy's early years, insurers may deduct fees when you cash surrender. After fees, your cash surrender value might be less than your current cash value.

The surrender charge can start as high as 10% to 35% of your policy cash value. Surrender charges decrease over time if your policy includes them. Most policies end the surrender charge after 10 to 15 years. Eventually, your cash surrender value matches your cash value.

Calculating Your Cash Surrender Value

When determining your cash surrender value, you must consider any fees your company will charge for canceling your policy. Check your cash value balance then subtract any surrender charges to determine how much money you will receive in a cash surrender.

For example, on a $100,000 variable universal life policy, after five years, you accrue $10,000 in cash value. With a 10% surrender charge, you'll pay $1,000 and receive $9,000.

Cash Surrender Value in Universal and Variable Life Insurance

Universal life insurance, universal variable life, and variable life insurance policies typically include a surrender period. If you cancel during this period, you may owe a surrender charge of up to 35% of your cash value balance. The insurer will deduct this charge from your cash value balance and pay you the remainder for your surrender value. There is no surrender charge when the surrender period ends, usually after 10 to 15 years.

Considerations Before Surrendering Your Life Insurance Policy

Cancelling your policy ends the contract. You stop paying premiums and get your cash surrender value, but you lose insurance protection. Your heirs will no longer receive a death benefit when you pass away.

Take a Partial Withdrawal

If you need some cash value, consider a partial withdrawal. This maintains your life insurance and whatever cash value is still in the policy will continue to grow. You can withdraw up to your paid premiums tax-free, but cash value gains are taxable. Partial value withdrawals will reduce your death benefit.

Cash values aren't guaranteed with universal and variable life policies. Sufficient cash value must remain inside the policy to support the death benefit.

Borrow With Cash Value Loans

You can also access your cash value with a loan. You do not owe income tax for borrowing cash value when you take out a loan, but the insurance company will charge interest until you pay the money back. You decide when to pay the money back. If you die with an unpaid loan, the insurance company will use your death benefit to pay off the loan, and then pay whatever is left to your heirs.

Use the Cash Value to Cover Your Premiums

To cover premiums, use your cash value. The insurer will deduct insurance costs from the balance. Once you spend down all your cash value, you need to start paying the premiums again or else you lose your coverage.

The Bottom Line

Cash surrender value is what you receive back for canceling a life insurance policy with cash value before it matures or you pass away. Only permanent policies like whole and universal life have cash surrender value. If you surrender the policy, you could owe fees and other charges. Therefore, the surrender value could be less than your current cash value. In addition, if you surrender your life insurance policy, it will impact your listed beneficiaries as you will no longer have insurance protection.

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