Cash surrender value
Life insurance is a valuable tool, but there may be times when you wish you could waive your premiums and receive some of your money back. Fortunately, some (but not all) insurance policies give you that option. Whole life insurance, permanent life insurance, variable life insurance, and universal life insurance all have cash value components, which means you will receive some money if you cancel your policy. There is no cash value option with term life insurance.
Before you surrender your life insurance policy to gain access to its cash surrender value, it is critical that you understand what the cash surrender value of life insurance is and how it is calculated.
What is cash surrender value?
The cash surrender value of your life insurance policy is the amount of money you would receive if you surrendered or cancelled your policy.
A whole life policy and other types of permanent life insurance include cash value. With these types of policies, your insurance provider puts a portion of your premiums into a cash value account, where the money can grow. Depending on the type of policy, the cash value component will move with market subaccounts, be calculated internally by the company, or grow at the current standard interest rate.
If you decide to surrender your life insurance policy, you will receive the cash value of the investments made within it, less any surrender fees. Term life insurance policies, as previously stated, do not include this component.
How is cash surrender value determined?
The cash surrender value of a life insurance policy can be calculated in a variety of ways, depending on the type of policy. The value of the investment fluctuates with the sub-accounts in which it is invested in variable life policies. The value of a whole life policy grows at a rate determined by the insurance company. The value of universal life policies grows at the industry standard rate. The following list goes into greater detail about how cash surrender value is calculated.
- Account duration: The duration of your account is the most important factor in cash value because it reflects both how long you have been paying into it and how long your investment has had to grow.
- Amount paid: A portion of your premiums is used to fund the cash value component of your life insurance policy. As a result, the more you pay, the greater your investment.
- Market performance: If your investment is linked to the market, market performance takes precedence. When the market performs well, your investment may perform well as well.
The surrender period must be completed before you can receive your cash surrender value. This is the time period that must elapse before you can access the cash value of your policy. The length of the waiting period is determined by the policy type and insurance company.
What are surrender fees?
When you claim the cash surrender value of your life insurance policy, most companies charge a surrender fee. In general, these fees are higher for newer policies and gradually decrease over time. Surrender fees differ significantly between plans and depending on the age or duration of the policy in question. Surrender fees, on the other hand, are typically in the 10% to 35% range.
Assume you have a 12-year-old life insurance policy with a cash value of $7,000 in it. You decide to cash in your policy for its cash value. After your insurance company deducts a 20% surrender fee, you receive $5,600, and the company deducts $1,400 in fees. The cash surrender value is the amount you receive, while the initial amount is the base cash value.
You should be aware that a portion of the cash surrender value of life insurance may be taxed. If you have any questions about the tax implications of your life insurance policy and its cash surrender value, contact your insurance company, agent, or an accountant.
Is surrendering your policy worth it?
Depending on your circumstances, surrendering your policy may be worthwhile. If you intend to change your life insurance policy, especially if it is with a different company, surrendering your policy may make a lot of sense.
Another possible time to surrender your policy is if you change jobs and your new job provides free or subsidized life insurance. Of course, you could surrender your policy if you are in desperate need of cash and have no other options. This final motivation, on the other hand, should only be used as a last resort. In such a case, obtaining a personal loan may make more sense. You may even be able to borrow against the proceeds of your life insurance policy.
Surrendering your policy is not always a wise decision. You are unlikely to be reimbursed for all premiums paid over the years. The cash surrender value does not constitute a refund. It only returns your investment after deducting any gains or losses.
Alternatives to surrendering your policy
Before you give up your life insurance policy and the protection it provides for your loved ones, it's a good idea to look into other options. Here are a few alternatives to surrendering your life insurance policy.
Withdraw cash value
In many cases, you can withdraw money directly from your cash value. You may be required to leave a certain amount of it in place, but you may be able to withdraw and use the remainder. Remember that any money you withdraw may be deducted from your death benefit, leaving your loved ones with less after you die.
Get a policy loan.
A policy loan is another way to get quick cash from your life insurance policy. These are loans in which your life insurance policy serves as collateral. If all or part of the loan is still owed when you die, your life insurance provider will deduct the amount owed from your death benefit.
Sell the insurance policy.
If you are adamant about cancelling your policy, you may be able to sell it instead. This could net you more than the cash surrender value while still removing the plan from your possession. This is referred to as a life settlement.
Frequently asked questions
What is cash surrender value?
The cash surrender value of your life insurance policy is the cash value of your investments after applicable surrender fees have been deducted.
What is a surrender period?
Most companies will require policies to be active for a certain amount of time before they can be surrendered for cash. This period of waiting is known as the surrender period.
Can I sell my life insurance policy?
Yes, you can contact your insurance company's agent and tell them you want to make a life settlement on your life insurance policy.
How much will I get if I surrender my policy?
The cash surrender value of a policy will vary depending on the policyholder. The cash surrender value is affected by factors such as the type of policy, how long it has been in place, and how much money has been paid into it.
When should you surrender your life insurance policy?
In general, you should only surrender your life insurance policy if you are replacing it with another policy. While it may be tempting to surrender your coverage in order to obtain the cash surrender value, you will be leaving your loved ones without the financial security that your policy's death benefit would provide if you died. If you are thinking about surrendering your life insurance policy for the cash surrender value, consult with an insurance agent or financial advisor first to make sure it is the best option for you.