Purchasing a life insurance policy can be a big financial decision. When it comes to protecting your loved ones if you pass away, a life insurance policy is an easy choice to set your family up for anything that could happen. But what if you no longer want your life insurance policy or can’t pay premiums? If you surrender your permanent life insurance policy, you will receive the cash surrender value for the policy.
Cash surrender value is the money you receive when terminating or surrendering your policy. When you pay premiums, a portion of that amount goes into the cash value of your permanent policy. That money then has the opportunity to grow based on rates determined by the insurance company and the type of policy you have. Then, when you surrender your policy, you can access a portion of the money you paid into the policy.
Key takeaways
Even though life insurance does financially protect your loved ones, surrendering your policy is an option if you no longer need it or cannot afford it.
- When you surrender your policy, you will receive the cash surrender value, which includes a portion of the premium payments you paid into the policy plus additional growth rates.
- The cash surrender value is calculated by taking the entire amount in the cash value account, and then the insurance carrier removes any additional surrender fees. The final product is what you take home.
- The process of surrendering your policy includes assessing it to familiarize yourself with the policy information and then contacting your insurance carrier. From there, you will complete the necessary paperwork and receive your payment.
How does cash surrender value work
Accumulation Phase
In the accumulation phase, your cash value has the opportunity to grow over time through premium payments, interest accrual, and potential dividends. When you pay premiums towards your permanent policy, a portion of the premiums goes towards your cash value account. Once in the account, your insurance carrier will generally set interest rates to help your funds grow. Dividends could also help if your policy meets specific terms. If a mutual insurance company experiences surplus earnings, it may distribute dividends to eligible policyholders, depending on policy type and company performance. A dividend can be reinvested into the policy, taken as cash, or used to pay premiums. Additionally, some policyowners may choose to sell their life insurance policy through a life settlement, allowing them to access a lump sum of cash, often greater than the surrender value, in exchange for transferring ownership of the policy to a third party.
Guaranteed vs. Non-Guaranteed Components
Guaranteed cash value components are the portions of your policy that your insurance carrier assures you will receive from the policy. This includes the cash value component that can grow over time and will not be impacted by external factors such as economic changes or company performance. Non-guaranteed components are potentially variable aspects, such as a dividend, that are not guaranteed to the policyowner since they depend on the insurance carrier’s profits.
Surrender Charges
As your policy reaches maturity, the surrender charges will decrease over time. Surrender charges are fees that an insurance company will charge you for surrendering your policy early. So, if you surrender your policy in the early years, you will pay more surrender fees than surrendering closer to the maturity date, when you can receive your funds with little to no surrender fees.
How to calculate the cash surrender value of life insurance
To estimate the cash surrender value you could receive, try the following formula:
Cash Value – Surrender Charges = Surrender Value.
Following that formula, you take your policy’s cash value and subtract the surrender charges from the insurance carrier to receive the final surrender value. This is the amount you will receive if you surrender your policy, and it is most often paid in a lump sum. To figure out how much you could receive for your life insurance policy in a life settlement, click here.
Alternatives to Surrendering Your Cash Value Policy
While surrendering your policy might sound like a good option to get easy cash if you can no longer afford premium payments, you might still be subject to surrender charges and lose protection from your life insurance policy. Rather than surrender your policy, there are other options to consider.
Withdrawals
If you need cash sooner, you can withdraw money directly from your cash value account with some insurance carriers. While you have access to this money since it is your account, it will most likely be subject to taxation. You also won’t be able to access the money in the future if you need it, so once the money is removed from the account, you can only add more money by paying premiums.
Loans
You can take out a loan on your policy by borrowing against its cash value. You would first contact your life insurance provider and take out the loan, and then you could use the cash as you need it. Then, you can repay the loan on your own time, and the money you pay back will go directly into your policy. The only downside is that if you end up surrendering your policy or passing away with a loan, your cash surrender value or the death benefit will have the loans taken out before the payout is made.
Paying Premiums with Cash Value
An Automatic Premium Loan (APL) is a feature in life insurance policies that can help keep your policy active by allowing the insurance carrier to take out small loans to cover premium payments from your policy’s cash value. This can help keep the policy active for some time, depending on how much cash value you have. Since this will use up the cash in your account, if you do want to surrender in the future and you don’t replenish the funds, you will receive less than you would’ve initially.
Life Settlement
A life settlement is a great way to get cash for your policy. Instead of worrying about potential surrender fees, selling your policy to a third-party provider allows you to get more money for your policy. A life settlement could have tax implications depending on your cost basis and the type of policy. A licensed tax or financial professional can help determine how much, if any, of the payout may be taxable.
Reach out to Ovid to help find alternative options for surrendering your policy and find a good fit for you and your lifestyle.
Steps to Take If You Decide to Surrender
Before surrendering your life insurance policy, remember that doing so is a significant decision that could have lasting consequences. If you are considering surrendering your policy, contact a financial professional to make sure that a policy surrender is the right choice for you and aligns with your financial goals. Ovid is here to help answer any questions you might have so you can make the best decision for yourself and your finances.
If you want to surrender your policy, follow these steps to ensure you are fully prepared.
- Assess your policy and needs. Before you surrender your policy, it is best to review it and assess your needs. Knowing if you want to surrender for financial reasons rather than not needing coverage anymore is a significant factor in your final decision and your options. Knowing all of the details of your policy ensures that you know the extent of what you could receive after you surrender the policy and what to expect from the insurance carrier.
- Contact your insurance company. After you assess your policy and your needs, contact your insurance company to let them know you want to surrender your policy. They may follow up with questions regarding you and your policy to proceed.
- Complete and submit surrender forms. Your insurance carrier should then provide you with surrender forms, which you must complete. These forms will detail the exact criteria of what will happen and how much you should receive. If you have any questions, contact your insurance carrier or a financial professional for an outside perspective.
- Receive the surrender value payment. Once the forms are received, you will receive the surrender value payment, and the transaction will be completed. Your life insurance policy will no longer be active, and you will no longer have to pay premiums. When you get this payment, there could also be potential tax implications to be aware of.
- Consider tax implications, financial planning, and consultation. After you surrender your policy, the funds you collect could be subject to taxation. Any amount you receive up to the total premiums you paid into the policy will not be taxed. Any additional money gained in the account that exceeds the premiums paid into the policy will then be taxed as income.
Types of Policies With Surrender Value
Whole Life Insurance
When you purchase a whole life policy, the insurance carrier will invest a portion of your premium payments into a cash value account. This money can grow because the carrier also sets a guaranteed interest rate for your funds to flourish. Dividends can also help grow your cash value account for whole life policies. Still, they depend on whether the carrier has an excess of funds that they will payout to certain policyowners based on the type of policy they have.
Universal Life Insurance
Similar to whole life insurance, universal life insurance is when the insurance carrier invests a portion of your premiums into a cash value account. The main difference is that the interest rate is not fixed and will fluctuate based on current market trends. Usually, carriers will have a minimum interest rate to protect the cash value account from an extreme market downturn. However, it still largely depends on how the market does overall. It’s also important to note that the cost of insurance and administrative fees is deducted from the policy’s cash value each month, which can reduce growth over time, especially as you age. You can incur additional charges as the insurance cost will increase as the insured ages, and those increases could be deducted from the cash value.
Variable Universal Life (VUL)
Policyowners can invest the policy’s cash value into subaccounts (similar to mutual funds) for potentially higher returns. While this is also considered a higher risk, policyowners can choose how they invest their money. Since this is a higher-risk life insurance policy, it is essential to manage these investments carefully, as they can result in additional losses and charges that can quickly reduce the cash value.
When to Surrender Life Insurance: Weighing the Pros and Cons
Surrendering your life insurance policy is a big financial decision. It would be best to weigh the pros and cons to ensure it is the best choice for your financial future.
Financial Needs
Sometimes, medical bills can come out of nowhere. Home repairs and debt repayments can also pop up, making it seem like there is no way out of these expenses. In those situations, paying premiums for a life insurance policy might not be as important, so accessing your policy’s cash value could be crucial. By surrendering your permanent policy, coverage will cease, but you can access the cash value to help pay for any expenses that pop up in your life and could help relieve some financial stress you feel.
Replacing Permanent with Term Insurance
In certain situations, switching from permanent to term life insurance makes more sense for you and your financial goals. Switching to a term policy could be better if you need coverage for a more cost-effective or temporary option. Term policies are generally cheaper and last for a specific period. So, if your children are now financially independent or you want to allocate less money towards premiums, term policies are a good option.
Policy Performance
Since permanent policies have a cash value component and can be considered investments, they can also underperform like other investments. If the cash value growth is consistently low, it could result from lower interest rates and other factors that are determined by the market. Understanding your policy type and options with your policy ensures that you will be prepared for any market fluctuation with adverse effects. Consistent policy loans and withdrawals can also deplete the cash value and prevent growth in the account.
Not sure if surrendering your policy is the right move? Ovid can help. Our team can help you explore your options — whether that means surrendering your policy, selling it for cash through a life settlement, or finding an alternative that better suits your financial needs. We’ll walk you through the process so you can make a confident, informed decision.
Cash Surrender Value FAQs
What is the difference between cash value and surrender value?
Cash value is the amount of money in your cash value account of a permanent life insurance policy. Your premium payments, interest growth rates, and potential dividends contribute to your cash value account growing over time. The surrender value is the amount you receive from your life insurance policy if you surrender it to the life insurance company. This will generally be less than the cash value in your account because many insurance carriers typically take out surrender fees and will use the funds to pay off any outstanding loans with them before you receive the remaining balance.
Is the cash value of life insurance taxable when surrendered?
Yes, the cash value of life insurance could be taxable when surrendered, but it depends on some factors. When you surrender your policy, any amount you receive up to the funds you paid in premiums towards your policies will not be taxed. Anything above the premiums you paid into the policy will be taxed as income.
Can I reinstate my policy after I’ve surrendered it?
No, you cannot reinstate your policy after it has been surrendered. When you surrender your policy, your insurance carrier pays the cash surrender value. Surrendering your policy results in an official termination of a contract, stating you want coverage to end without the death benefit payout. Since you signed a surrender contract with the insurance carrier, there is no way to reinstate that policy.
Can I surrender my policy if it has outstanding loans or policy adjustments?
Yes, you can surrender your policy if it has outstanding loans or policy adjustments. The only catch is that your cash surrender value payout will be lower as the insurance carrier uses the remaining funds to pay outstanding loans and any other fees.
What happens if I don’t pay back a loan taken against my cash value?
If you don’t repay a loan taken against your cash value, the loan could be subject to interest, and you might have the loan amount deducted from your final cash surrender value. This would lower the total you receive after surrendering your policy, but it will generally not have any other effects on you.
