Cash Surrender Value

What Is Cash Surrender Value?

Cash surrender value is defined as the internal value of an insurance policy at any point that is equal to the value of the accumulation account minus a surrender charge. Surrender charges gradually reduce to zero after a specified time, such as after the first 10 years of the policy’s life. Cash surrender value is the sum of money an insurance company pays to a policyholder or an annuity contract owner if their policy is voluntarily terminated before its maturity or an insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. It is also known as "cash value" or "policyholder's equity."

Understanding Cash Surrender Value

Cash surrender value applies to the savings element of whole life insurance policies payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

Cash surrender value is the accumulated portion of a permanent life insurance policy's cash value that is available to the policyholder upon surrender of the policy. Depending on the age of the policy, the cash surrender value could be less than the actual cash value.

In the early years of a policy, life insurance companies can deduct fees upon cash surrender. Depending on the type of policy, the cash value is available to the policyholder during his lifetime. It is important to note that surrendering a portion of the cash value reduces the death benefit.

Depending on the age of the annuity, charges may apply to partial and full surrenders. Taxes are deferred until surrender, at which point an additional premature withdrawal penalty may apply depending on the age of the annuitant.

Special Considerations

In most whole life insurance plans, the cash value is guaranteed, but it can only be surrendered when the policy is canceled. Policyholders may borrow or withdraw a portion of their cash value for current use. A policy's cash value may be used as collateral for low-interest policy loans. If not repaid, the policy's death benefit is reduced by the outstanding loan amount. Loans are tax-free unless the policy is surrendered, which makes outstanding loans taxable to the extent they represent cash value earnings.

The cash surrender value of an annuity is equal to the total contributions and accumulated earnings, minus prior withdrawals and outstanding loans.

In universal life insurance plans, the cash value is not guaranteed. However, after the first year, it can be partially surrendered. Universal life policies typically include a surrender period during which cash values can be surrendered, but a surrender charge of up to 10% may be applied. When the surrender period ends, usually after seven to 10 years, there is no surrender charge. Policyholders are responsible for the taxes on portions of the surrendered cash values that represent cash value earnings.

In either case, sufficient cash value must remain inside the policy to support the death benefit. With whole life insurance plans, loans are not considered cash surrenders, so the level of cash value is not affected. With universal life insurance policies, cash values are not guaranteed. If cash value growth falls below the minimum level of growth needed to sustain the death benefit, the policyholder is required to put enough money back into the policy to prevent it from lapsing.