What Is Cash Surrender Value? How It Compares to Cash Value

What Is Cash Surrender Value?

Cash surrender value is money an insurance company pays to a policyholder or an annuity contract owner if their policy is voluntarily terminated before 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 policyholder's equity.

Key Takeaways

  • The cash surrender value is the amount of money that a life insurance company pays out to a policy or annuity holder if they decide to end the plan.
  • Cash value is the amount of equity in a life insurance policy.
  • Not all life insurance policies offer cash value accounts.
  • The savings element of cash value is built when the policyholder pays over the monthly premium, and it goes into an interest-generating account, which may accrue over time and accessed.
  • The older the policy, the more equity is held in it.

Cash Surrender Value

Understanding 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.

Reduction of Benefits and Charges

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 can be available to the policyholder during their lifetime. It is important to note that surrendering a portion of the cash value reduces the death benefit.

Depending on the age of the annuity, charges may apply to partial and full surrenders. Taxes are deferred until surrender, at which point an additional premature withdrawal penalty may apply depending on the age of the annuitant.

Cash Surrender Value vs. Cash Value

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.

The cash surrender value of an annuity is equal to the total contributions and accumulated earnings, minus prior withdrawals and outstanding loans.

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.

How Do You Determine Cash Surrender Value?

The cash value and the surrender value are two different things. When determining your cash surrender value, you must consider any fees your company will charge for removing your money funds. In order to determine how much money you will receive in a cash surrender, you must add up all the payments you have made to the policy and then subtract the fees and possible penalty withdrawal charges.

For example, suppose you take out a whole life insurance policy for $100,000. You make 10 years of payments and build up a cash value of $10,000. However, the surrender change will cost you 30% of the cash value. You will have to pay $3,000 in charges, and you will only get $7,000 out of the cash surrender. The good news? You most likely won't pay taxes on the cash surrender because it is considered a return of premiums on your account and not taxed.

Don't overestimate your surrender or cash value, which is not reflective of the amount of coverage you have taken out for the death benefit. A cash value is tied to the policy as a benefit to help offset the rise in premiums as you grow older and offers policyholders access to money they can borrow.

Special Considerations

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. There is no surrender charge when the surrender period ends, usually after seven to 10 years. 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 insurance plans, loans are not considered cash surrenders, so the level of cash value is not affected. With universal life insurance 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 must put enough money back into the policy to prevent it from lapsing.

Which Kinds of Life Insurance Have Cash Surrender Values?

Whole, universal, variable universal, and indexed universal life insurance often have a cash value component to them.

Should You Get a Policy With Cash Value?

It depends on your individual financial situation. If you have maxed out contributions to your retirement account, have a cash nest egg saved for emergencies, and you can afford the monthly premiums on a whole or universal life insurance with a cash value benefit, they may be a good choice. However, if you cannot afford a lifetime of high premiums and you are struggling to save for retirement, these accounts are not recommended as a tool for investment.

Can You Use the Cash Value and Still Keep the Policy?

In many cases, it is possible to use the cash value in your account to pay your premiums. By doing so, you keep the coverage in place for your beneficiaries. You can also take out loans against your cash value, and keep the policy. If you cash out the value, your death benefit may be reduced.

Can You Sell Your Life Insurance Policy?

While not always advisable, you may be able to sell your life insurance policy to a third party for cash.

The Bottom Line

There are only certain kinds of life insurance that even offer a cash value component as whole and universal life. When you surrender the cash value in your life insurance policy, the transaction will be terminated. If you borrow from the cash value, your policy stays in place. If you surrender your policy, you lose the cash benefit, and you will likely be hit with fees and other charges, especially if your policy is relatively new with little equity built into it. In addition, if you surrender your life insurance policy, it will impact your listed beneficiaries.

Whole life insurance guarantees a cash value but you can only surrender it when you cancel your policy. Universal life insurance tends to be more flexible with its cash value, allowing policyholders to partially surrender the cash after the first year of holding the policy. Overall, if you surrender your policy in order to tap its cash, you will not receive the actual cash value of the policy but its surrender value, which most likely will be substantially less than the full policy.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Equitable. "Will I be taxed on the growth of the cash value of my life insurance?"

  2. Allstate. "What Is Cash Value Insurance?"