What is Cash Surrender Value?
The cash value of permanent life insurance
When you purchase most permanent life insurance, you get coverage with a cash value component. This is a savings vehicle within the policy. Each time you pay your premiums, the life insurance company directs a portion of that money to your cash value. That amount also grows (or shrinks) depending on the type of policy you purchased:
Whole life insurance cash value grows at a steady rate of interest and, in most cases, pays dividends, as well.
With universal life insurance, that growth gets tied to the performance of a specific market rate.
Variable life insurance cash value grows relative to the performance of a specific portfolio of investments that the policy owner has chosen.
Regardless of the type of permanent life policy you choose, the cash value component gives you a living benefit. That means you can access it while alive. You can use the cash value as collateral for a low-interest rate loan, for example.
You can also cash out the cash value by surrendering the life insurance policy.
When people surrender life insurance
People generally buy permanent life insurance to last their lifetimes. But circumstances can change. Maybe you got a new job with impressive group life insurance coverage, or maybe you paid off your mortgage in full and are no longer worried about the financial obligations you’ll leave behind. Maybe you can simply no longer afford your life insurance premiums.
Whatever the reason may be, you have the option to surrender your life insurance policy. At that point, you cancel your coverage and the life insurance company distributes the current cash value of your policy to you, minus any fees.
Factoring in surrender fees
Universal life insurance policies charge surrender fees, also called surrender charges, during the first few years. In some cases, the fees associated with surrender decrease over time.
Regardless, surrender fees are an important consideration for people thinking about giving up their universal life insurance to claim the cash value. Review the applicable fees carefully to avoid unwelcome surprises.
It’s also worth noting that any cash value earnings on any type of life insurance policies (i.e., cash surrender value you would receive over and above what you’ve paid in premiums) can be subject to taxes. Any amount withdrawn that is below the basis — i.e., the money paid into the policy as premium — can be withdrawn tax-free.
Once a permanent policy has matured, there will usually be gains, sometimes significant ones, as well. To ensure that you won’t be hit with a large income tax bill when surrendering your policy, be sure to speak to a life insurance and taxation professional.