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What is the 'Cash Surrender Value'

The cash surrender value is the sum of money an insurance company pays to the policyholder or annuity holder in the event his policy is voluntarily terminated before its maturity or the 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 portion of the cash value that builds up inside a permanent life insurance policy that is available to the policyholder. Depending on the age of the policy, the cash surrender value can be less than the actual cash value. In the early years of a policy, the life insurance company may deduct expenses upon cash surrender. Depending on the type of policy, the cash value is available to the policyholder during his lifetime. However, surrendering a portion of the cash value reduces the amount of the death benefit.

How to Access 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. However, policyholders may borrow a portion of their cash value for current use. Policyholders pay a low rate of interest on the loan, which, if not repaid, results in a reduced death benefit. 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, but it can be partially surrendered after the first year. Universal life plans 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 more 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.

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