- Cash surrender value is the funds you receive by canceling a life insurance policy.
- It's your cash value amount minus surrender fees or charges
- Before surrendering your cash value, speak to an accountant or tax advisor about its tax implications.
- Compare life insurance online in minutes with Everyday Life Insurance.
If you have a permanent life insurance policy, you likely have built up some cash value. If you want to withdraw those funds, you'll have to cancel or surrender your policy. Liquidating your cash surrender value comes with significant consequences, namely, giving up your death benefit. It's important to carefully consider those drawbacks before surrendering your policy.
Cash surrender value basics
Cash value is a unique feature of permanent life policies, like whole life or universal life insurance. With this feature, a portion of your premiums earn interest on a tax-deferred basis, growing your policy. You can use the cash value of permanent life insurance during your lifetime for various financial goals, such as paying your children's college tuition, funding a business, purchasing a second home, or paying your premiums.
The initial years of a permanent life insurance policy are expensive compared to what you'll pay in the future. "In the early years of overpayment, the cash value put inside the policy earns interest, and you use that bucket of money to offset the cost of insurance when you're older," said Mark Williams, CEO of Brokers International.
Cash surrender value is the amount you receive if you decide to cancel your life insurance policy. This amount equals your cash value minus surrender charges or fees. It's important to remember that canceling your coverage and accessing your cash surrender value means forfeiting your death benefit.
Why consider surrendering your policy
You need emergency cash
If you're facing financial hardship, using your cash surrender value is a viable alternative to drawing down your retirement funds or taking out a traditional loan. However, it still comes with irreversible consequences. Consider borrowing from your policy instead. You can avoid surrender charges and maintain your coverage.
You no longer need your policy
If there's no one who depends on you financially (i.e., your adult children move out or your mortgage is paid off), you may no longer need coverage. In that case, surrendering your policy for your cash value may be right for you. For example, many people use the cash value to fund their retirement, paying themselves a monthly income when they stop working.
You want to change your coverage
If you want cheaper life insurance or coverage better suited to your needs, you may decide to cancel your policy in exchange for a new one. Again, canceling your policy also means surrendering your cash value, which comes with fees and potential tax implications.
However, a 1035 or "like-kind" exchange allows you to transfer your cash value from one permanent policy to another without immediate tax liabilities. Before performing this transaction, speak to a financial advisor to see if it's right for you.
The downsides of surrendering cash value
Loss of protection
Surrendering your policy cancels your coverage, which means your beneficiaries won't get a death benefit if you pass away.
Potential surrender fees
Some insurance companies charge fees associated with a cash value surrender, depending on how long you have the policy and when you surrender it. This varies by provider, so it's important to review your policy for cancellation terms and fees that might be incurred.
Tax implication
Williams warned that because the money inside the policy has been growing on a tax-deferred basis, you may pay taxes on the cash value upon surrendering the policy. The IRS will tax your cash surrender value if it exceeds the total premiums you paid.
Cash surrender value FAQs
You can typically find information about how your insurance company calculates your cash surrender value on your policy documents or online account portal. The most direct way to get accurate and up-to-date information is to contact your insurance company. They can provide you with the current cash surrender value of your policy.
It depends on your needs. If you want your coverage to stay in force, you can take out a policy loan with interest. If you want to get rid of your current life insurance, surrendering your policy may be the more suitable option. Regardless, it's important to seek professional and personalized advice from an independent insurance agent or a financial advisor.
No, only permanent life insurance policies allow you to surrender your cash value. Term life insurance doesn't offer a cash value component. It only offers a death benefit.
