What Is Cash Surrender Value?

What Is Cash Surrender Value of a Life Insurance Policy?

While term life insurance policies usually last 10 to 30 years and only pay death benefits, permanent life insurance policies (such as whole life and universal life) offer protection over your entire lifetime and also build a cash reserve fund. The actual cash value amount you earn depends on your premium, the length of the policy and the current standard interest rate your policy earns.

The cash surrender value is the money you will receive if you terminate your life insurance policy, minus any surrender fees. Surrender fees vary from one insurer to the next, and it's not uncommon to see fees as high as 10% to 35%. Over time, these fees will usually decrease. If you cancel your policy, you may receive a reduced death benefit or no benefit at all, but you will also not pay any further premiums.

When you pay your premiums on a permanent life insurance policy, a portion of the money goes to your death benefit, some of the money pays any required fees and the remainder is deposited into the cash value part of your account. Keep in mind that if your policy is new, you will likely receive very little in cash value when you cancel your policy. That's because the cash value part of the policy hasn't had time to accumulate.

Cash Surrender Value vs. Cash Value

If you're thinking about canceling your cash value life insurance policy, it's good to know the differences between cash surrender value and cash value.

Cash Surrender Value

Cash surrender value refers to the actual amount of money you receive when you cancel—or surrender—your life insurance policy or annuity, minus surrender fees or any funds needed to pay off loans or unpaid premiums. In the case of annuities, it may be called the annuity surrender value.

Cash Value

Cash value, also called account value, is the money and accrued interest held in your account that can grow over time on your permanent life insurance policy or cash-value-generative annuity. You can use this money to increase your death benefit, make partial withdrawals or take out loans against the cash value.

How Is Cash Surrender Value Calculated?

When you apply for a permanent life insurance policy, the insurance company will calculate your surrender period based on eligibility, amount of coverage and rating class, such as "preferred plus" or "preferred best."

Calculating your cash surrender value starts with your insurer looking at the current cash value amount in your account. Then they may subtract surrender fees or other outstanding amounts to determine your final net cash value.

For example, let's say you take out a universal life insurance policy for $250,000. You make 10 years of payments and accrue a cash value of $25,000. Your insurer charges a surrender fee of 2% of the cash value. That means you'll pay a fee of $500 and get $24,500 in cash value if you surrender your policy.

Should You Surrender Your Life Insurance Policy?

There are times when surrendering your life insurance policy may make sense.

• You switch jobs and your new employer offers a free or subsidized life insurance policy.
• You want to switch from a whole life policy to a term life policy.
• You want to switch insurance companies, or your rating class changes.
• You need cash fast and have few other options.

There are also times when surrendering your policy may not be the best option.

• You've had the policy for only a short time and accrued very little cash value.
• You are not up to date on your premiums.
• Your policy is relatively new, so surrender fees are high.
• You lose your death benefit.

Alternatives to Surrendering Your Policy

Instead of surrendering your policy, you may want to explore other options.

• Make a partial withdrawal. If you need cash for an unexpected emergency and don't have an emergency fund in place, you may want to make a partial withdrawal from the cash value in your account. You can also use the withdrawal to make your premium payments if you can no longer afford them. Keep in mind that this will likely lower your death benefit.
• Sell your policy. If you can no longer afford your policy, you may choose to try and sell it to a third party for a one-time cash payment. After the sale, the third party becomes a beneficiary on the policy and assumes premium payments. They also receive the death benefit when you pass away.
• Take out a loan. Another alternative to surrendering your life insurance coverage is taking a policy loan that uses your policy as collateral for the loan. If you still owe money at the time of your death, that amount will be subtracted from your death benefit.