Cash Surrender Value of Life Insurance

In this article...
  • Find out how to calculate the cash surrender value of life insurance, and learn about how surrender value compares to cash value and loans against a policy.

The cash surrender value of life insurance policies can provide access to money for unexpected expenses. Taking the cash surrender value can also be a sensible way to terminate a life insurance policy that you no longer need. But you'll want to understand how surrender value is calculated and how it compares to other options before moving forward. And if you're shopping for life insurance, you may want to understand whether surrender value is a term that matters to you. 

What Is Cash Surrender Value?

The cash surrender value of a life insurance policy is the amount of money the policyholder gets if they terminate the policy early. For example, if you purchase a whole life policy but decide that you no longer want it after a few years, the cash surrender value is the amount the insurance company will pay when you cancel the policy. 

People may consider taking the cash surrender value of their life insurance policy if they no longer want to pay the premiums or need immediate cash. Taking the policy's surrender value may be a good option if the policyholder can't pay the premiums or no longer needs life insurance. However, if the policyholder simply needs an immediate sum of cash due to unforeseen circumstances, taking a loan against the life insurance policy's cash value may be a wiser choice. 

What Is the Difference Between Cash Value and Surrender Value of Life Insurance? 

Cash value life insurance lets you build up savings and earn interest or dividends. The cash value of a life insurance policy is typically equal to any premiums or extra money paid into the policy plus interest earned.

Policyholders are often able to take out a loan against the cash value of their policies. Taking a loan doesn't cancel the policy. The policy remains in effect as long as the policyholder complies with the repayment agreement and other terms. If the loan is not fully repaid before the policyholder dies, the outstanding amount is taken from the total life insurance payout. 

Cash surrender value is not a loan. Instead, the policyholder gets some or all of the policy's cash value in exchange for terminating their life insurance. The policyholder doesn't have to make loan or premium payments. However, the insurance is canceled, and the insurer will not have to pay a benefit when the policyholder dies. The surrender value equals the cash value after subtracting a surrender charge and other fees. Cash surrender value can be significantly less than the actual cash value, especially if the policy has only been in effect for a few years or less. 

Which Types of Life Insurance Policies Have a Cash Surrender Value? 

Permanent life insurance policies with a cash value, such as a savings or investment element, tend to have cash surrender values. These may include whole life and universal life insurance policies. Whole life policies often have guaranteed cash surrender value while universal life policies have hefty surrender fees. 

Some types of life insurance policies don't offer a cash surrender value, or the cash surrender value may only be a portion of premiums paid. If you think cash surrender value may be important to you in the future, you'll want to consider this when deciding which kind of policy you want. 

How Do You Calculate Cash Surrender Value of Life Insurance? 

Cash surrender value generally equals the cash value of the policy minus any applicable fees. These fees depend on the policy's specific terms but usually include a surrender charge and processing fees. 

A surrender charge is a fee the insurance company charges when a policyholder wants to terminate the policy and take out their funds. Surrender charges are usually higher in the early years of a policy and go down over time. These charges can be 10% or more in the first years of a policy, but the surrender value may equal the entire cash value in the later years of a whole life policy. You can review your policy to determine how much the surrender charge is and whether the insurance company will charge additional fees. 

Is Cash Surrender Value Taxable? 

Cash surrender value is not taxable up to the amount of premiums or other funds you have paid into the policy. The money you paid in was already taxed when you earned it and isn't taxable again when returned to you. 

However, any investment earnings, such as interest or dividends, are taxable. If the cash surrender value after fees exceeds the amount you've paid into the policy, you will owe taxes on the excess. 

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