Cash surrender value is the money you receive from your life insurance provider when you cancel or surrender your policy. This value is a feature of whole life and other permanent life insurance policies.
With these policies, a part of your premium payments is allocated to a cash value account that grows over time. The growth rate depends on factors like market performance, internal calculations, or interest rates, based on your specific policy type.
If you choose to cancel your life insurance policy, you will receive the cash value after any surrender fees are deducted. It’s important to note that term life insurance policies do not have a cash value component and, therefore, do not provide a cash surrender value.
How is Cash Surrender Value Determined?
Cash surrender value is calculated differently depending on the type of life insurance policy:
- Variable life policies: The cash value fluctuates with the performance of the investment sub-accounts it’s tied to.
- Whole-life policies: The cash value grows at a rate determined by the insurance company.
- Universal life policies: The cash value grows at the industry-standard rate.
Several factors influence the cash surrender value:
- Account duration: This reflects the time you’ve invested in the policy and how long the investment has had to grow.
- Premium payments: A portion of your premiums contributes to the cash value, so higher payments lead to a bigger investment.
- Market performance: If your policy’s cash value is tied to the market, its performance will impact the value.
What Happens When a Policy is Surrendered for its Cash Value?
When claiming the cash surrender value of your life insurance policy, most companies charge surrender fees. These fees are typically higher for newer policies and decrease over time.
Surrender fees vary between plans and depend on the policy’s age or duration, often ranging from 10% to 35%.
Consider a 12-year-old life insurance policy with a $7,000 cash value. If you decide to surrender the policy and the surrender fee is 20%, you’ll receive $5,600, while the insurance company takes $1,400 in fees.
The initial $7,000 is the base cash value, while the amount you receive after fees is the cash surrender value.
Note that you might be taxed on a portion of the cash surrender value. Consult with your insurance company, agent, or accountant if you’re unsure about the tax laws related to your life insurance policy’s cash surrender value.
Alternatives to Surrendering Your Policy
Before surrendering your life insurance policy, consider these alternatives:
- Withdraw cash value: You may be able to withdraw a portion of your policy’s cash value, though this could reduce the death benefit for your beneficiaries.
- Take out a policy loan: Use your life insurance policy as collateral for a loan. If the loan is unpaid at the time of your death, the outstanding amount will be deducted from the death benefit.
- Sell the policy: Selling your policy, also known as a life settlement, may provide more money than the cash surrender value. You can work with brokers, contact insurance companies directly, or ask your provider for assistance. The process involves finding a buyer, agreeing on a price, filling out an application, and transferring the policy rights for payment.
These options can help you access funds while preserving some financial protection for your loved ones.
Frequently Asked Questions
Which types of life insurance policies have cash surrender value?
Permanent life insurance policies, such as whole life, universal life, and variable life policies, have cash surrender value. Term life insurance policies do not.
How is cash surrender value calculated?
It depends on factors like policy type, account duration, premium payments, and market performance (for variable life policies).
Are there fees associated with claiming cash surrender value?
Yes, most insurance companies charge surrender fees, usually ranging from 10% to 35%, depending on the policy’s age and duration.
Will I owe taxes on the cash surrender value?
You might owe taxes on a portion of the cash surrender value. Consult with a tax professional or your insurance company for specific information.
Are there alternatives to surrendering my policy for cash value?
Yes, alternatives include withdrawing a portion of the cash value, taking out a policy loan, or selling your policy in a life settlement.
How long does it take to receive cash surrender value after canceling my policy?
The time frame varies by insurance company and policy type, but it usually takes several weeks to a few months.
Can I partially withdraw cash value without surrendering my policy?
Yes, in many cases, you can withdraw a portion of your policy’s cash value and maintain your coverage with a reduced death benefit.
Does the cash surrender value increase over time?
Yes. As you continue to pay premiums and the policy’s investments grow, the cash surrender value typically increases over time.
