What Is Cash Surrender Value?

Life insurance is designed to provide financial protection, but life happens, and your needs might shift. If you have a permanent policy, it could have built-up cash value, giving you the option to terminate your policy for a payout. But before cashing out, understanding how much you’d actually get and whether it is a wise choice is an important part of the process. Knowing how cash surrender value works can also help you weigh your options and decide if walking away from your policy is the right call.

What is the cash surrender value of life insurance?

If you cancel a permanent life insurance policy before it pays out, you may be able to walk away with its cash surrender value. Unlike term life insurance, which has no cash value component, permanent policies — like whole life, universal life and variable life — can build cash value over time. Part of your premium covers the cost of insurance and administrative expenses, while the rest goes towards the cash value that grows differently depending on your policy type.

For example, whole life policies guarantee steady growth, universal life adjusts based on interest rates and variable life policies tie cash value to investment accounts that can rise or fall with the market.

If you surrender the policy, the insurer pays out the cash value, but surrender charges, fees, outstanding loans or other deductions may reduce the final amount. Before making that call, weigh the trade-offs — once the policy is gone, so is your coverage.

How is cash surrender value determined?

If you decide to cash out your life insurance policy, you won’t simply walk away with the full cash value. The cash surrender value (CSV) is what’s left after the life insurance company deducts surrender charges, outstanding loans or any past withdrawals.

A surrender charge is in place to discourage policyholders from canceling their policies right away, since insurers can lose money if it happens often. Most policies follow a graded schedule, where the charge starts high and gradually decreases. In many cases, it could be 100 percent in the first year, meaning you’d get nothing if you surrendered your policy in year one. These fees typically phase out after ten to fifteen years, but the exact timeline varies by policy.

Let’s break this down. Say you’ve had a whole life policy for five years, and it has built up $20,000 in cash value. If your policy has a 5 percent surrender charge, here’s how that would play out:

• Total cash value: $20,000
• Surrender charge (5% of $20,000): $1,000
• Outstanding loans or withdrawals: $0 (assuming none)
  • Final cash surrender value = $19,000

If you’re thinking about surrendering your policy, it’s smart to ask your insurer for an in-force illustration and a current statement of values — this document lays out your current cash value, surrender fees and how the policy is projected to grow. If the numbers aren’t clear, an experienced licensed insurance professional can walk you through them and help you decide if cashing out is the best move.

How does cash value grow?

The way cash value grows depends on the type of permanent life insurance you have:

• Whole life insurance: Offers steady, predictable growth with a guaranteed interest rate set by the insurer. Some policies also pay dividends, which can help boost cash value over time.
• Universal life insurance: The cash value grows based on interest rates set by the insurer. However, these rates can fluctuate, but there’s a guaranteed minimum to protect against big losses.
• Indexed universal life insurance: Links cash value growth to a stock market index, like the S&P 500. While there’s potential for higher returns, most policies have a cap on gains and a floor to help limit losses.
• Variable life insurance and variable universal life: Invests the cash value in market-based subaccounts, similar to mutual funds. This gives the potential for bigger gains but also comes with market risks — meaning your cash value can rise and fall.

What happens when a policy is surrendered for its cash value

Once you decide to surrender your life insurance policy, you’re canceling it permanently in exchange for the cash surrender value. Once it’s gone, there’s no getting it back — your coverage ends, and your beneficiaries won’t receive a death benefit.

One thing to keep in mind: if the payout you receive is more than the total premiums you’ve paid (your cost basis), the extra amount is typically considered taxable income. That means it gets added to your regular earnings and taxed at your usual income tax rate.

Before pulling the plug on your policy, think about the long-term impact. If you need coverage again later, you’ll likely pay higher premiums due to age or health changes.

Is surrendering your policy worth it?

Surrendering a life insurance policy is usually only worth considering if you no longer need coverage or can no longer afford the premiums. However, before canceling, explore alternative options that could help maintain your coverage while reducing costs.

If affordability is a concern, contact your insurer or agent to see if you can:

• Lower the face amount to reduce your premium.
• Use accumulated cash value to help pay premiums.
• Switch to a reduced paid-up policy, which eliminates premiums while keeping some level of coverage.

Since surrendering your policy means forfeiting your death benefit and potentially incurring taxable gains, it’s typically best to make this a last-resort option.

Alternatives to surrendering your policy

Before you give up your life insurance policy and the financial protection it gives your loved ones, it may be wise to explore other options. Here are a few options you can consider before surrendering your life insurance policy.

Withdraw cash value

In many cases, you can make a direct withdrawal from your cash value. You may have to leave a specified amount of it in place but might be able to withdraw and use the rest. Keep in mind that the money you take out will typically be deducted from your death benefit, leaving your loved ones with less after you pass away.

Take out a policy loan

Another way of gaining quick money through your life insurance policy is a policy loan. These are loans that use your life insurance policy as collateral. If all or part of the loan is outstanding at the time of your death, your life insurance provider will subtract the owed amount from your death benefit. Keep in mind that, just like standard personal loans, any loans taken out against your policy will accrue interest.

Sell the policy

If you are determined to cancel your policy, then you might be able to sell it instead. This may net you more than the cash surrender value while still taking the plan off of your hands. This transaction is called a life settlement.

There are brokers for life insurance policies, but it is also possible to contact insurance companies directly. In some cases, your provider may be able to sell your policy for you in return for fees. Once you’ve located a buyer, the life settlement process is relatively straightforward. A price is agreed upon, and you fill out a specialized application. If that goes well, then you exchange the policy rights for the agreed-upon price.

This process may take a couple of months or longer. However, some life settlement companies will provide partial or full payments before the entire process is complete.

Frequently asked questions

• What is the best life insurance company?
  

  There’s no single best life insurance company — it really depends on your personal situation. Every insurer evaluates factors like health and lifestyle differently, so the best fit for one person might not be the best for another. If you have a medical condition, a high-risk job or specific coverage needs, shopping around is key. Compare multiple quotes to find a policy that balances affordability, strong financial ratings and solid customer service. The best policy is often the one that offers the right coverage at a price that works for you.

• Is the cash surrender value of life insurance taxable?
  

  A portion of the cash surrender value may be taxable as income, depending on what it’s worth and how much you’ve paid. Typically, this tax applies to any amount you receive in cash value that is in excess of what you have paid in premiums on the policy. The rest of the cash value is the amount you paid in and will not be taxed at this point because it will have previously been part of your taxable income. This taxable portion also includes interest gained on your policy’s cash value.

• What is the difference between cash value and cash surrender value?
  

  Cash value is the total amount your life insurance policy has built up over time. Cash surrender value is what you’d actually get if you cancel your policy — it’s the cash value minus any surrender fees, unpaid loans or withdrawals.

• What is the difference between face value and cash surrender value?
  

  The face value of a life insurance policy is the initial value of the policy. If you don’t make any adjustments to the policy, for example, take out a policy loan, access living benefits or earn dividends, then the face amount will typically equal the death benefit amount your beneficiaries are paid upon your passing. A lot of people incorrectly assume their policy is worth its face value if you opt to surrender it, but cash surrender value is completely different. The CSV is often much lower due to surrender fees and the time it takes for cash value to grow and compound.