What Is Cash Surrender Value?
Let me explain cash surrender value directly: it's the money you receive as a life insurance policyholder when you cancel your policy before it matures or before you pass away. This applies to permanent life insurance policies like whole life and universal life, where there's a savings component built in. Think of it as the policyholder's equity. The insurance company might deduct a surrender charge before handing over the cash value, so you need to be aware of that.
How It Works
Here's how cash surrender value operates in practice. When you pay premiums on a permanent life insurance policy, part of that builds up as cash value over time. If you decide to surrender the policy, the insurer pays you this accumulated amount, but they could subtract fees. You build this value through your payments, and it grows gradually. Instead of surrendering, you could withdraw or borrow against it, but surrendering means you get the cash and end the policy.
Cash Surrender Value vs. Cash Value
You should understand the difference between cash surrender value and cash value. Cash value is the total equity you've built in the policy. But when you surrender early, the company deducts fees, so your cash surrender value ends up less than the full cash value. These surrender charges can start at 10% to 35% and decrease over time, usually vanishing after 10 to 15 years, at which point they match.
How Is Cash Surrender Calculated?
Calculating cash surrender value is straightforward once you know the components. Start with your current cash value balance, then subtract any surrender charges, prior withdrawals, or outstanding loans. For instance, if you have $10,000 in cash value after five years on a $100,000 policy and face a 10% surrender charge, you'd pay $1,000 in fees and receive $9,000. Remember, this isn't the same as your death benefit; it's just the savings portion you can access.
Cash Surrender Value for Universal and Variable Life
For universal life, variable universal life, and variable life policies, there's typically a surrender period. If you cancel during this time, you might face charges up to 35% of your cash value. The insurer deducts this from your balance and pays you the rest. After the period ends—often 10 to 15 years—there's no charge, so surrender value equals cash value. These policies don't guarantee cash value growth, unlike whole life.
Should You Surrender Your Policy?
Deciding whether to surrender your policy requires careful thought. Surrendering ends the contract, stops your premiums, and gives you the cash surrender value, but you lose all life insurance protection, meaning no death benefit for your heirs. If you only need some money, consider a partial withdrawal instead; it lets you keep the policy and continue growing the remaining cash value, though it reduces the death benefit and may involve taxes on gains.
Another option is borrowing against your cash value through a loan. You won't pay income tax on the loan, but interest accrues, and you repay on your terms. If you die with the loan unpaid, it's deducted from the death benefit. You could also use cash value to pay premiums, deducting costs from your balance until it's depleted, at which point you resume payments or risk losing coverage.
Frequently Asked Questions
You might wonder which policies have cash surrender values: whole, universal, variable universal, and indexed universal life often do, minus any charges. Whether to get a cash value policy depends on your finances—if you've maxed retirement savings, have an emergency fund, and can afford high premiums, it might suit you; otherwise, it's not ideal for investing. Yes, you can use cash value to pay premiums or take loans while keeping the policy, though it reduces the death benefit. Selling your policy via a life settlement is possible but not always advisable.
The Bottom Line
In summary, cash surrender value is what you get for canceling a permanent life insurance policy early, based on its cash value minus fees. Only policies like whole and universal life have this feature. Surrendering could mean charges and loss of coverage, so consider alternatives like loans or withdrawals to preserve protection for your beneficiaries. This is a technical aspect of insurance, so evaluate it based on your situation without assuming it's an investment tool.
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