What is cash surrender value? How does it work?

Cash surrender value is the actual amount of money you will receive if you choose to terminate a permanent life insurance policy before its maturity date, or before you die. That value differs from your life insurance policy's cash value which is the total sum compiled in your policy's cash account.

Your cash surrender value is the amount of cash you've built, minus any surrender charges or fees. Those charges diminish with time, so the longer you've had your account, the closer the cash surrender value will be to the cash value.

In most cases, your policy’s cash surrender value will be paid in a lump sum. Depending on your policy, however, you may receive periodic payments over time. To determine what that value is and how it is paid out, you have to look at your policy contract, which should spell out all those details.

Remember that cash value in whole and universal life insurance policies grows tax-deferred. As long as the money remains in the policy, it's not taxed, so it can grow faster. However, once cash value is withdrawn from the policy (or the policy is surrendered), you may owe taxes if you receive more in surrender value than the sum of premiums you paid into the policy.

Which types of policies have cash surrender value?

Life insurance comes in two primary forms: term life and permanent life. Term life insurance is typically less expensive, but it only lasts for a limited period of time – the term of the policy, typically 10 or 20 years. Term policies don’t build cash value, so of course, there’s no cash surrender value.

Unlike term life insurance, permanent life insurance builds cash value and is available in several forms. The most popular types of permanent insurance are whole life and universal life.

How to calculate your cash surrender value amount.

Your whole life cash surrender value is the guaranteed cash value shown on your policy plus the value of any dividends accumulated in the policy.

Your universal life cash surrender value is the current cash value of your policy less any surrender charges. And, if you’ve had the policy for 10-15 years, the surrender fees typically go away.

Or in either case, you can contact your financial representative or life insurance company for current cash surrender value. Your policy’s surrender value could well be higher than the amount paid in, and you may owe taxes on the difference.

Is surrendering your policy an option you should consider?

There are two downsides to surrendering your life insurance policy. First, you lose your life insurance protection. Second, you may have to pay fees and lose some of your cash value. Fortunately, if you want to access your cash value – or find that you can no longer afford the premiums – there are other choices you can make:

  • Withdrawal 
    In most situations, you can take a cash withdrawal from your permanent life policy, and that money will not be subject to income taxes if it’s less than the amount paid into the policy. However, there are potential disadvantages: First, your death benefit will likely be reduced, depending on your cash value. Also, that reduction may be greater than the amount withdrawn, depending on the specific terms of your policy.
  • Loans 
    You can typically borrow money against your policy, although the amount varies. The money does not come from your policy but rather from the insurer who uses your policy as collateral. Life insurance loans include interest payments, but it's typically a lower rate than you'd get with personal loans or even a home equity loan. No loan application or credit check is required, and your credit rating does not impact your interest rate. You can choose not to repay, but the outstanding loan balance will typically be deducted from your death benefit. A policy loan can be an option to consider if you need cash but want to keep the full death benefit in force after repaying the loan amount.
  • Use cash value to pay your life insurance premiums 
    You can typically use the money in your cash value to pay part or all your policy premiums, making it easier to keep your coverage in place. This is a popular option for older policyholders who want to use retirement income for living expenses but still want to keep life insurance coverage in place. However, if the policy's cash value becomes too low, your policy may lapse.

Talk to your agent or life insurance company for the specifics of how withdrawal, loans, premium payment, and surrender work for your cash value life insurance policy.

Do you need a life policy with a cash surrender value?

As with any other financial services product, the decision to get a policy with cash value – and cash surrender value – comes down to your life situation and goals. If you want life insurance protection that lasts your entire life, then a permanent life insurance policy with a cash surrender from an experienced provider can be a valuable choice for your needs. If you’d like to learn more, contact Guardian to find a financial professional who will take the time to learn about your unique situation, listen to your concerns, and clearly explain the different insurance options that best fit your needs and your budget – from a company that’s been helping protect families for over 160 years.

Key Take Aways:

  1. Permanent life insurance offers cash surrender value if you cash in your policy before the maturity date; term life insurance policies do not.
  2. Cash surrender value equals your policy's cash value, minus any surrender fees.
  3. Surrendering (cashing in) your policy is not always the best option. You can access policy cash in other ways, for example, with a policy loan.
  4. If you have a permanent policy, talk to your life insurance provider to determine the best options for accessing policy cash value.

Frequently asked questions about cash surrender value

How do I calculate the cash surrender value amount of an insurance policy?

Your whole life cash surrender value is the guaranteed case value shown on your policy plus the value of any dividends accumulated in the policy.

Your universal life cash surrender value is the current case value of your policy less any surrender charges. And, if you’ve had the policy for 10-15 years, the surrender fees typically go away.

But in either case, you can contact your life insurance company for your current surrender value. Also, if your cash surrender value is higher than the amount you’ve paid into your policy, you will likely have to pay taxes on the difference.

What is the difference between cash value and surrender value?

Cash value is the amount of money accrued in your policy's cash value, including any compound interest. The surrender value refers to the cash value minus any surrender fees due when you cash in your life insurance policy.

Is the cash value of life insurance taxable when surrendered?

It can be. If your cash value is higher than the amount you've paid into your life insurance policy, you may owe taxes on the difference.

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This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

2 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

3 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

4 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

5 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

6 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

7 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

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