What Is Cash Surrender Value?

Cash surrender value is the money an insurance company pays a policyholder or annuity contract owner if the policy is voluntarily terminated before maturity or if 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 equity.

Cash surrender value applies to the savings element of whole life insurance policies payable before death. During the early years of a whole life policy, however, the savings portion produces very little return compared with the premiums paid.

Cash surrender value is the accumulated portion of a permanent life insurance policy's cash value available to the policyholder when the policy is surrendered. Depending on the policy's age, cash surrender value may be lower than the actual cash value.

Benefit Reductions and Charges

During a policy's early years, life insurance companies may deduct fees upon cash surrender. Depending on the type of policy, cash value may be available to the policyholder during their lifetime. It is important to note that surrendering part of the cash value reduces the death benefit.

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

Cash Surrender Value vs. Cash Value

In most life insurance plans, cash value is guaranteed but 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 can serve as collateral for low-interest policy loans. If a loan is not repaid, the policy's death benefit is reduced by the outstanding loan balance. Loans are tax-free unless the policy is canceled, which makes outstanding loans taxable to the extent they represent cash value gains.

How Is Cash Surrender Value Determined?

Cash value and surrender value are two different things. When determining your cash surrender value, you must account for the fees your company will charge to withdraw your funds. To determine how much money you will receive in a cash surrender, add all payments you have made into the policy, then subtract fees and any potential withdrawal penalties.

Which Types of Life Insurance Have Cash Surrender Values?

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

Should You Get a Cash Value Policy?

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

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

In many cases, you can use your account's cash value to pay premiums. Doing so keeps coverage in force for your beneficiaries. You can also borrow against cash value and keep the policy. If you withdraw the value, your death benefit may be reduced.

Can You Sell Your Life Insurance Policy?

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

Only certain types of life insurance, such as whole life and universal life, offer a cash value component. When you surrender your life insurance policy's cash value, the transaction ends. If you borrow from the cash value, your policy remains in force. If you surrender the policy, you lose the cash benefit and will likely face fees and other charges, especially if the policy is relatively new and has little accumulated equity. Surrendering your life insurance policy will also affect your named beneficiaries.