Introduction: Cash Surrender Value Unveiled
Cash surrender value is the amount of money a life insurance policyholder receives upon canceling their policy before maturity or death. This value represents the savings component of most permanent life insurance policies, such as whole life and universal life. It’s also referred to as the policyholder’s equity. Be aware that surrendering the policy may involve fees known as surrender charges.
Key Takeaways
- Immediate Cash: The cash surrender value is the immediate payout policyholders receive upon canceling their life insurance plan.
- Equity Component: It represents the policyholder’s equity accrued over time.
- Growth Over Time: This value increases with consistent premium payments.
- Potential Fees: Be mindful of possible deductions for surrender charges.
- Alternative Access: You can withdraw or borrow against your cash value without surrendering your policy.
Delving Deeper: Understanding Cash Surrender Value
Many permanent life insurance policies accumulate cash value as premiums are paid. This reserved money can be withdrawn during your lifetime. On canceling the policy, known as a surrender, you’ll receive this cash value minus any applicable fees. In whole life policies, the growth of the cash value is guaranteed, though returns are modest in the early years. Over time, the accumulated cash value improves, boosting the cash surrender value. Upon surrendering the policy, you typically receive your paid premiums back tax-free. Any excess over the paid premiums might be subject to income tax.
Cash Surrender Value vs. Cash Value
Initially, insurers may impose fees upon cash surrender, reducing the payout below the current cash value. Surrender charges, often ranging from 10% to 35%, usually decrease over time and disappear after 10 to 15 years, making the cash surrender value and cash value equal by then.
Calculating Cash Surrender Value
To calculate your cash surrender value, check your current cash value balance and subtract any surrender charges:
Illustration Example
Imagine you have a variable universal life insurance policy worth $100,000. After five years of payments, you accrue a $10,000 cash value. With a 10% surrender charge, you’d pay $1,000 in fees and receive $9,000.
Remember, the surrender value reflects policy equity, unrelated to the death benefit’s size. It adjusts premiums as you age and affords policyholders financial flexibility.
Beyond Basic Policies: Specifics for Universal and Variable Life
Universal life, universal variable life, and variable life insurance policies tend to have surrender periods with fees up to 35%. These charges diminish over 10-15 years, disappearing entirely upon period expiration.
Deciding the Best Path: Should You Surrender Your Policy?
Surrendering a policy terminates life insurance coverage and premiums but provides all the cash surrender value. However, canceling means surrendering death benefit protections for heirs.
Alternative Options
Partial Withdrawals
If you need partial cash value, opt for a withdrawal. You preserve the insurance while remaining cash value continues to accrue, albeit reducing the death benefit.
Cash Value Loans
Policyholders can also borrow against the cash value, frequently free from income tax repercussions. Insurers charge interest, and any unpaid loans at death deduct from the death benefit remainder.
Covering Premiums with Cash Value
You can use cash value to offset premium payments, but exhaust your balance, and you’ll revert to out-of-pocket premiums or lose coverage.
Policies with Cash Surrender Values
Permanent policies, including whole, universal, variable universal, and indexed universal life, commonly feature cash value components reducible by surrender charges upon policy cancellation.
Should You Opt for A Policy Featuring Cash Value?
Your financial situation dictates suitability. High-earning individuals maxing out retirement contributions and maintaining emergency savings may benefit from such policies. Conversely, those struggling with premium payments and retirement savings are generally advised against using them as investment tools.
Can You Utilize Cash Value While Retaining Coverage?
Yes, you can apply cash value to premiums or take partial loans/withdrawals while maintaining the policy. However, such actions reduce the death benefit.
The Possibility of Selling Your Insurance Policy
You may sell your life insurance policy to a third party for cash, called a life settlement.
Concluding Thoughts
Cash surrender value offers financial flexibility but comes with surrender fees and insurance termination. Permanent policies like whole life and universal life typically include these surrender values. Weigh your needs carefully as surrendering impacts your beneficiaries by canceling life protection.
Disclaimer: Consider consulting a financial professional tailored to your specific circumstances before taking any action, as financial decisions involve risks, including potential loss of principal.
Related Terms: cash value, life insurance policy, surrender charge, whole life insurance, universal life insurance.
References
- Guardian Life. “What Is the Cash Surrender Value of Life Insurance?”
- Experian. “What Is Cash Surrender Value?”
- Guardian Life. “What Are the Tax Benefits of Whole Life Insurance?”
- Allstate Insurance Company. “What Is Cash Value Insurance?”
- Harbor Life Settlement. “How To Sell Your Life Insurance Policy for Cash”.
