The “cash surrender value” is a term used in life insurance to describe the amount of cash that a policyholder is entitled to receive if they decide to terminate the policy before it matures or the insured event occurs (such as the death of the insured). This value is applicable to permanent life insurance policies, such as whole life and universal life insurance, which have a savings component in addition to the death benefit. To take money out while keeping the policy, see “Withdrawal value”.
Key aspects of the cash surrender value include:
Accumulation
Over time, part of the premiums paid into a permanent life insurance policy contribute to the cash value of the policy. This cash value grows on a tax-deferred basis, based on interest rates, dividends, or other investment gains, depending on the type of policy.
Accessibility
Policyholders can access the cash surrender value through withdrawals or policy loans, subject to the terms and conditions of the policy. However, accessing the cash value may reduce the death benefit and can have tax implications.
Surrender charges
If a policyholder decides to surrender the policy and take the cash surrender value, there may be surrender charges deducted from the cash value, especially if the policy is surrendered in the early years. These charges decrease over time and often disappear after a certain number of years. Surrender charges apply mainly to universal life policies; whole life policies usually have no surrender charge, but their cash values build slowly in the early years.
Net amount
The cash surrender value is the cash value of the policy minus any outstanding loans and interest on those loans, as well as any surrender charges that may apply.
Policy termination
Surrendering a policy for its cash surrender value effectively terminates the policy. The policyholder will no longer have coverage, and no death benefit will be paid upon their death. Surrendering can create a taxable gain: the cash surrender value received minus the policy’s adjusted cost basis.
The cash surrender value provides a financial resource that policyholders can tap into if needed, but it’s important to carefully consider the implications of surrendering a policy, including the loss of insurance protection and potential tax consequences.