What is the cash surrender value of life insurance? – NerdWallet

One advantage of buying permanent life insurance is that it offers both a death benefit and a savings component called cash value. If you no longer need life insurance — say, because your children are grown and financially independent — you can cash out the policy. The cash surrender value is the money you’ll receive after terminating a permanent life insurance policy.

Cash surrender value is the amount of money a policyholder receives when they terminate a permanent life insurance policy before it matures or before they die.^[0]

When you buy permanent life insurance, part of the premium goes toward insuring your life. The remainder goes toward a cash value component that functions kind of like a savings account. Cash value is the equity in your policy. It grows slowly at first, but the value accelerates over time thanks to the power of compound interest and earnings.

If you opt to terminate your policy, your loved ones won’t receive a death benefit. Instead, you’ll receive the policy’s cash surrender value, which is the cash value minus any surrender charges or fees.

Because policies don’t have significant cash value in the first few years, you typically won’t get much money when surrendering your policy early on. Plus, most policies charge surrender fees for the first 10 to 15 years that the policy is in force.

Most policies pay the cash surrender value in a lump sum, though some may make periodic payments. Check your policy contract to learn how the carrier pays out cash surrender value.

The cash surrender value equals the policy’s cash value minus surrender fees. Any loans you’ve taken against the policy will also decrease the cash surrender value.

Due to surrender fees and the slow accumulation early on in the policy, the cash surrender value may be less than the premiums you’ve paid — or even zero — during the first few years.^[0]

The cash value in a permanent life insurance policy grows on a tax-deferred basis. But if you cash out a policy, you’ll typically owe taxes if the cash surrender value is higher than what you paid in premiums.

For example, if you’ve paid $20,000 in premiums and the cash value of your policy is $25,000. Your insurer charges a 4% fee to terminate the policy, so the cash surrender value is $24,000. Generally, the $4,000 gain would be considered taxable income.

Term life insurance policies don’t have a cash surrender value because they don’t accumulate cash value. Only permanent life insurance policies have a cash surrender value.

• Whole life insurance: Cash value in a whole life policy accumulates at a rate guaranteed by your insurer. If your policy earns life insurance dividends, cash value and cash surrender value can grow at an even higher rate than the insurer guarantees.

• Universal life insurance: With universal life insurance, cash value and cash surrender value will increase or decrease based on current interest rates.

• Variable life insurance: Both variable life insurance and variable universal life policies let you invest the cash value in mutual fund-like subaccounts. Your cash value and cash surrender value have more growth potential, but they could also drop significantly due to poor market performance.

Surrendering a life insurance policy is a big decision, given that your loved ones won’t receive a death benefit. However, there are some scenarios where terminating a policy for the cash surrender value makes sense:

• You need a large sum of money. When you surrender your policy for its cash value, you can use the money however you want. That can be helpful if you’re facing major medical expenses or home repairs, you need to pay off debt, or you want to save more for retirement or an emergency.

• You no longer need life insurance. Life insurance needs change over time. If your children are grown or you’ve paid off your mortgage, you may opt to surrender a policy for the cash value since your loved ones don’t need a death benefit.

• Borrow against the policy. You can take out a loan for as much as the entire cash value of a policy. You’ll need to pay interest on the loan. You could pay back the loan in full to the carrier, or you could repay the interest and have the loan deducted from the death benefit. Borrowing against the policy’s cash value is a good option if you need money but don’t want to give up the policy.

• Withdraw a portion of the cash value. If you want to keep the policy and don’t need the entire cash value, you could do what’s known as a partial cash surrender. You withdraw a portion of the cash value and the policy remains in force, though the death benefit is reduced.

• Use the cash value to pay premiums. If you need coverage but can’t afford the premiums, check the policy contract to see if it allows you to pay premiums using the cash value. Some policies also offer a reduced paid-up option, which allows you to use the cash value to pay in full for a whole life policy with a lower death benefit.

• Sell your policy. Selling your life insurance policy to a third party for an amount that’s lower than your death benefit may be an option. This is known as a life settlement. A life settlement that occurs when a person with a chronic or terminal illness sells their policy is known as a viatical settlement.^[0]