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. Surrender Period

    The surrender period is the amount of time an investor must wait ...
  2. Surrender Fee

    A surrender fee is a charge levied against an investor for the ...
  3. Unbundled Life Insurance Policy

    An unbundled life insurance policy is a type of financial protection ...
  4. Yearly Price Of Protection Method

    The yearly price of protection method determines the cost of ...
  5. Add To Cash Value Option

    An add to cash value option is a life insurance policyholder's ...
  6. Variable Life Insurance

    Variable life insurance is permanent life insurance product with ...
Related Articles
  1. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  2. Taxes

    How Life Insurance Settlements Can Help Retirement

    The life insurance industry is offering more ways for consumers to access the death benefits in their policies. Here's one of the newest.
  3. 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.
  4. Financial Advisor

    Permanent life policies: Whole versus universal

    If you're looking for life-long security, choosing between these whole and universal life policies is a key decision.
  5. 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.
  6. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  7. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  8. Financial Advisor

    How Life Insurance Can Help With Cash Accumulation

    Did you know permanent policies also offer the prospect for reasonable cash value accumulations?
  9. Investing

    Consider These Facts Before Choosing a Variable Annuity

    Variable annuities do have some benefits, but there are some disadvantages and misconceptions to take into account as well.
  10. Financial Advisor

    Index universal life versus whole life insurance: A comparison

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center