Cash Surrender Value of Life Insurance: What Is It and How Does It Work?

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ByMandy Sleight
Edited byVictoria Copans
ByMandy Sleight
Edited byVictoria Copans

Updated: June 2, 2024

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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 surrender fee and loan balance from your policy's total cash value. For example, if your policy's account has accumulated a $10,000 cash value and you have an outstanding loan of $2,500, plus a surrender fee of $100, your net cash surrender value would be $7,400 — $10,000 minus $100 and $2,500.

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Key Takeaways

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The cash surrender value of life insurance is the amount a policyholder receives when canceling a permanent life insurance policy.

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The formula to calculate the cash surrender value of life insurance is as follows: current cash value minus surrender fees and outstanding debts (withdrawals or loans you have taken against the cash value) equals net cash surrender value.

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Exploring alternatives to surrendering a life insurance policy, such as policy loans, life settlements or partial withdrawals, can offer financial flexibility while retaining some insurance protection.


What Is Cash Surrender Value?

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

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

How Cash Surrender Value Works

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.

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Here’s how to calculate the cash surrender value of your life insurance policy:

Net Cash Surrender Value = Cash Value - Surrender Fees

To calculate the cash surrender value of life insurance, add up all the payments applied to the policy. Then, subtract the surrender fees and outstanding balances against the accumulated cash value. To calculate the surrender fees, you’ll have to review your life insurance contract. Surrender fees typically start at around 10%, gradually declining the longer you keep the policy in force.

What to Consider About Cash Surrender Value

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.

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    The cash value increases over time

    The cash value will continue to increase with each premium payment. The more premiums you pay, the larger your cash value account will grow. Interest can also help with cash value growth over time. As long as the money stays in the life policy, it will grow tax-free. If you choose to surrender your life insurance policy, you can receive the net cash surrender value, which will be reduced by the policy surrender charges and any outstanding loan balance.

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    Surrender fees can go down over time

    The longer you keep the policy in force, the lower the surrender fees go. If you surrender the life insurance policy for cash value later, you’ll get a larger net cash surrender value.

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    Surrender fees vary per insurer

    Each company sets surrender fee schedules for its permanent life insurance plans, which can differ by product. Comparing surrender fee schedules and how much of the premium goes towards the cash value can help you decide which permanent life policy to choose.

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    Surrender fees can be waived

    If you notify the insurance company in advance that you’ll be surrendering the policy in the future, they might waive the surrender charges as long as you continue to make payments for a certain length of time.

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    The cash surrender value payment can be deferred for six months

    According to the standard nonforfeiture law for life insurance, a company has the right to hold the net cash surrender value payment for up to six months after you request to surrender the policy.

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    Your cash surrender value can be taxable

    If your net cash surrender value is higher than the premiums you paid into the policy, surrendering the life insurance policy may have tax consequences because the excess is considered taxable income.

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    Loans and withdrawals lower the cash surrender value

    Although you can withdraw or borrow against the policy's cash value, any outstanding balance, including interest, will be deducted from that cash value.

Tax Implications of Cash Surrender 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.

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Cash Value (Accumulation Value) vs. Cash Surrender Value

The cash value (or accumulation value) is the amount that goes into the life insurance policy savings account, while the cash surrender value is the amount you get to keep after you cancel the policy and appropriate deductions are made.

Face Amount (Death Benefit) vs. Cash Surrender Value

The face amount death benefit is the amount your beneficiary receives when you die. The cash surrender value requires you to cancel the policy, which entitles you to any remaining cash value minus fees and outstanding balances.

Reasons to Surrender a Life Insurance Policy

Things happen in life that may prompt you to surrender your life insurance policy, such as:

You lose your job

Losing your job may mean you can no longer afford the policy or need a cash infusion from taking the cash value to pay bills. After cutting all unnecessary costs from your budget, surrendering your policy should be a last resort.

Financial obligations have been met

Many people take out life insurance to cover outstanding debts, like a mortgage or student loans. Once you pay off the debt, the policy has served its purpose, and you may no longer need to keep it in force.

Dependents have grown up

You might take out a life insurance policy to cover childcare, tuition costs or the cost of raising a child in the event of your death. Once your children have grown, you may no longer need the policy.

You found a better life insurance plan

You’ve worked to get another life insurance policy with a better rate and fee structure and no longer need your original policy. Just make sure you get the new policy in place before you cancel your existing policy so that there is no gap in coverage if you were to die in between.

The policy isn't right for you

Sometimes, after a more thorough review of the policy contract details, you later find out that it isn’t right for you. This happens most often with indexed and variable universal life policies.

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Make sure you understand what happens when you surrender a life insurance policy for cash value before canceling the life insurance policy. You’ll no longer have the death benefit, which means your beneficiary won’t get the face amount when you die.

Alternatives to Surrendering a Life Insurance Policy

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.

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    Borrowing Against the Policy

    Many permanent life insurance policies allow you to take out a loan against the cash value. This provides immediate funds while keeping the policy active. However, the loan amount plus interest reduces the death benefit if not repaid.

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    Policy Loans

    This involves using your policy's cash value as collateral for a loan. It's a way to access funds without surrendering the policy. Keep in mind that unpaid loan balances may reduce the death benefit.

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    Reduced Paid-Up Option

    Some policies offer a reduced paid-up option, enabling you to stop paying premiums in exchange for a lower death benefit. This option maintains some coverage without ongoing premium payments.

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    Life Settlement

    Selling your life insurance policy to a third party in exchange for an immediate cash payment can be more advantageous than surrendering. The buyer assumes premium payments and becomes the beneficiary.

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    Partial Withdrawals

    If permissible, partial withdrawals from the cash value can offer funds without complete surrender. However, doing this might reduce your death benefit and remaining cash value, impacting long-term benefits.

FAQ About Cash Surrender Value of Life Insurance

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

What is cash surrender value?
What does it mean to surrender a life insurance policy?
How do you calculate the cash surrender value of life insurance?
What is the difference between cash surrender value, cash value and face amount?
How do you surrender a life insurance policy?
How long can a cash surrender value payment be deferred?
Does term life insurance have a cash surrender value?
What kind of policy allows withdrawals or partial surrenders?
Do you have to pay tax on your policy’s cash surrender value?
How do you calculate tax on life insurance cash surrender value?

About Mandy Sleight

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Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.