Cash Surrender Value of Life Insurance

The cash surrender value of life insurance is the amount you receive after canceling a permanent life insurance policy. This value is exclusive to permanent life insurance policies, as term life insurance does not include a cash value component. The cash surrender value serves as a financial return from your policy, providing monetary benefits under circumstances where the continuation of the policy is not viable or preferred.

Calculate the amount of your cash surrender value by subtracting the life insurance surrender charge (surrender fee) and loan balance from your policy's total cash value. For example, if your policy's account has accumulated a whole life insurance cash surrender value of $10,000 and you have an outstanding loan of $2,500, plus a surrender fee of $100, your net cash surrender value would be $7,400, or $10,000 minus $100 and $2,500.

Cash surrender value refers to the sum you're entitled to when terminating a permanent life insurance policy. After subtracting any applicable life insurance surrender charges and outstanding policy loans from the accumulated cash value, the cash surrender value of the life insurance policy is the remaining amount.

Only permanent life insurance policies, such as whole and universal, have a cash value that can be accessed by surrendering the policy. Term life insurance does not have a cash surrender value — if you cancel the policy, you won't receive anything back. The cash surrender value in life insurance is a significant consideration for policyholders contemplating policy termination, offering a potential financial resource.

Surrendering a life insurance policy is another way of saying you're canceling it. When you no longer need a life insurance policy, you can cancel or surrender the life insurance policy for cash value. Once it's surrendered, you cannot reinstate the policy. If you need life insurance again, you have to reapply and qualify for a new policy.

Surrendering your policy also cancels or revokes your death benefit, so your beneficiary receives nothing if you die. This is similar to canceling a car insurance policy. After ending your auto insurance, the company won't pay for the damages if you get into an accident.

To cancel and get the cash surrender value of your life insurance policy, contact your insurance company, fill out the surrender form and return it for processing. The insurer will then give you the net cash surrender value.

Understanding the terms cancellation and surrender is important when managing an insurance policy, as they pertain to different processes with distinct financial implications.

Cancellation of a life insurance policy typically means terminating it before its term expires, which can happen in term life insurance and other policies. When a policy is canceled, especially before the end of the term, you usually receive no return premium and lose coverage immediately.

On the other hand, surrendering a life insurance policy refers to terminating a permanent life insurance policy before its maturity or the policyholder's death. By surrendering your life insurance policy, you are essentially withdrawing from the policy earlier than planned, and in return, you receive the cash surrender value of your life insurance.

The key difference between canceling and surrendering an insurance policy lies in the financial outcomes. Cancellation generally yields no monetary return, whereas surrender provides the policyholder with the accumulated cash surrender value, subject to applicable fees and loans.

There are various reasons to surrender a life insurance policy, such as finding a better life insurance rate elsewhere, losing a job and no longer being able to afford the premiums or needing the cash value to stay afloat. Below are some things to consider when surrendering a life insurance policy for its cash value.

When surrendering a life insurance policy, the Internal Revenue Service (IRS) may tax any amount of the net cash surrender value that exceeds the premiums you've paid into the policy. For example, if your premiums amount to $20,000 and the cash surrender value is $25,000, the IRS could tax the $5,000 excess as income. While the premiums you've paid (the principal amount) are generally not taxed, any profit above this amount is taxable.

Understanding and planning for potential tax consequences is essential when considering surrendering your life insurance policy for its cash value.

Each of these scenarios could lead to surrendering a life insurance policy, a decision not made lightly due to potential tax consequences of surrendering a life insurance policy and the loss of future coverage.

Considering alternative options can be financially advantageous before opting to surrender a life insurance policy. These alternatives often provide access to needed funds or allow you to adapt the policy to changing life circumstances without losing all insurance coverage. This approach can help ensure you maintain some level of protection while addressing immediate financial needs or re-evaluating long-term insurance strategies.

Here are some of the most common questions people ask about the cash surrender value of life insurance.