Loading the player...

What is 'Cash Surrender Value'

The cash surrender value is the sum of money an insurance company pays to a policyholder or an annuity contract owner in the event that his or her policy is voluntarily terminated before its maturity or an insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. It is also known as "cash value," "surrender value," and "policyholder's equity."

BREAKING DOWN 'Cash Surrender Value'

Cash surrender value applies to the savings element of whole life insurance policies payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid. Cash surrender value is the accumulated portion of a permanent life insurance policy's cash value that is available to the policyholder upon surrender of the policy. Depending on the age of the policy, the cash surrender value could be less than the actual cash value. In the early years of a policy, life insurance companies can deduct fees upon cash surrender. Depending on the type of policy, the cash value is available to the policyholder during his lifetime. It is important to note that surrendering a portion of the cash value reduces the death benefit.

The cash surrender value of an annuity is equal to the total contributions and accumulated earnings, less prior withdrawals and outstanding loans. Depending on the age of the annuity, charges may apply to partial and full surrenders. Taxes are deferred until surrender, at which an additional premature withdrawal penalty may apply depending on the age of the annuitant

Accessing Cash Surrender Values

In most whole life insurance plans, the cash value is guaranteed, but it can only be surrendered when the policy is canceled. Policyholders may borrow or withdraw a portion of their cash value for current use. A policy's cash value may be used as collateral for low-interest policy loans. If not repaid, the policy's death benefit is reduced by the outstanding loan amount. Loans are tax-free unless the policy is surrendered, which makes outstanding loans taxable to the extent they represent cash value earnings.

In universal life insurance plans, the cash value is not guaranteed.  However, after the first year, it can be partially surrendered. Universal life policies typically include a surrender period during which cash values can be surrendered, but a surrender charge of up to 10% may be applied. When the surrender period ends, usually after seven to 10 years, there is no surrender charge. Policyholders are responsible for the taxes on portions of the surrendered cash values that represent cash value earnings.

In either case, sufficient cash value must remain inside the policy to support the death benefit. With whole life plans, loans are not considered cash surrenders; so the level of cash value is not affected. With universal life policies, cash values are not guaranteed. If cash value growth falls below the minimum level of growth needed to sustain the death benefit, the policyholder is required to put enough money back into the policy to prevent it from lapsing.

RELATED TERMS
  1. Adjusted Premium Method

    The adjusted premium method is a common formula that insurance ...
  2. Yearly Price Of Protection Method

    The yearly price of protection method determines the cost of ...
  3. Net Amount at Risk

    Net amount at risk is the monetary difference between the death ...
  4. Accumulation Option

    An accumulation option is a policy feature of permanent life ...
  5. Adjustable Life Insurance

    Adjustable life insurance is a term and whole life hybrid insurance ...
  6. Term Life Insurance

    Term life insurance is a type of life insurance that guarantees ...
Related Articles
  1. Insurance

    Life Insurance: How To Get the Most Out Of Your Policy

    There are many benefits to owning a life insurance policy - if you get the right one for you.
  2. Insurance

    How Cash Value Builds in a Life Insurance Policy

    If you have permanent life insurance, more of your insurance premium goes to cash value in the early years of your policy.
  3. Managing Wealth

    Mistakes to Avoid When You Own Life Insurance

    How to avoid some common mistakes that can cause tax and inheritance problems when you own life insurance.
  4. Retirement

    Taking The Bite Out Of Annuity Losses

    If this investment product has caused you sleepless nights, it's time to consider alternatives.
  5. Insurance

    Using Lapsing Life Insurance as a Tax Advantage

    There are several ways to use a lapsing life insurance policy to shield future taxable income.
  6. Retirement

    Life Insurance vs. IRA for Retirement Saving

    Sure, you can tap your permanent life insurance policy to help fund your retirement. But in most cases, an IRA is the better choice. Here's why.
  7. Retirement

    Life Insurance in a Qualified Retirement Plan

    The opportunity to pay life insurance premiums with pre-tax dollars is appealing, but the additional costs of requirements may outweigh the benefits.
  8. Managing Wealth

    Why Life Settlements Offer a Way Out

    Life settlements offer an additional option for life insurance policy owners deciding what to do with a policy they no longer want or need. Find out why.
  9. Financial Advisor

    Understanding Life Insurance Premiums

    When buying permanent life insurance, what amount of premium should you pay for the coverage?
  10. Insurance

    How a Death Benefit in a Variable Annuity Works

    Before making investment decisions it’s important to fully understand what you're paying for and if the cost makes sense in your particular situation.
Trading Center