What is the Cash Surrender Value of Life Insurance?

Forfeiting your life insurance policy for its cash surrender value is a way of accessing some or all of its cash value. Cash surrender value only applies to whole or universal life insurance policies, and surrendering life insurance for a lump sum isn't right for everyone.

Below, you can find out how cash surrender value of life insurance works and when it's worth considering. 

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What Is Cash Surrender Value?

Many permanent life insurance policies include a savings element known as cash value. The savings element comprises any premium contributions paid by the insured that exceed the death benefit, and it accumulates interest in an investment account.

Policy holders can terminate their insurance policies during their lifetimes in exchange for a lump sum called the cash surrender value. Generally, a policy's cash surrender value is equal to the cash value minus a surrender charge. 

How Does Cash Surrender Value of Life Insurance Work?

Insurance companies want you to continue to pay your regular premiums. Therefore, they usually discourage enrollees from attempting to access the cash value attached to their insurance policy and terminating their insurance by charging surrender fees. Surrender charges can change year on year, and many policies remove surrender charges altogether between 10 and 15 years after you purchase the plan. 

Therefore, the lump sum you receive if you surrender your insurance plan within a few years of buying the policy is likely to be significantly less than the actual cash value. However, you may receive an amount equivalent to the cash value if you wait until surrender charges are no longer in effect before surrendering your policy. 

Bear in mind that surrendering a life insurance policy means forfeiting the death benefit, so your beneficiaries won't receive a payout when you die. Unlike death benefits, the cash surrender value of your policy is taxable. 

Do Term Life Insurance Policies Have Cash Surrender Value?

Term life insurance policies don't accumulate cash value like whole or universal policies. Therefore, they don't have a surrender cash value either. You can surrender your term life insurance policy if you no longer need it and don't want to continue paying premiums. However, you won't receive a lump sum when you surrender term life insurance. 

Can You Access Cash Value Without Surrendering a Life Insurance Policy?

Some life insurance policies let you withdraw a portion of the cash value. Withdrawing cash value is different to surrendering your policy. You'll retain your coverage, but the withdrawal will reduce the overall death benefit available to your beneficiaries. 

Alternatively, your insurer may let you take out a loan using your policy's cash value as collateral if you need access to funds. You won't pay tax on the loan unless you surrender your policy, in which case the loan is treated as cash value earnings and taxed accordingly. Taking a loan out against your life insurance policy's cash value will reduce the death benefit if you die before repaying the loan. 

When Should You Surrender Life Insurance?

Surrendering your life insurance policy in return for the cash surrender value will leave you uninsured. Therefore, it's not usually recommended unless you no longer need life insurance. For example, you may not need life insurance coverage if you no longer have a dependent spouse or children who would experience financial distress in the event of your death. 

Some people decide that surrendering a policy for its cash surrender value is worthwhile if it makes them more financially comfortable, especially if it's no longer subject to surrender charges. Surrendering your policy means you'll no longer need to make monthly premium payments. It could also release a lump sum to pay off outstanding debts, such as a mortgage, or provide money to live off in retirement. 

However, it's essential to consider the return-on-investment you can expect from surrendering your policy. Surrendering a relatively new policy is unlikely to release significant amounts of cash, and you'll usually be charged steep fees to do so.

It's also important to consider the impact of income tax on your lump sum payout. It's worth consulting a tax adviser before surrendering your life insurance policy to help you decide if it's the best option for your circumstances.