What Is Cash Surrender Value?
Cash surrender value refers to the amount of money a policyholder can receive from their life insurance policy upon its cancellation before maturity. This feature is inherent in most permanent life insurance products, including whole life and universal life policies. It is sometimes referred to as the policyholder's equity. When a policyholder decides to surrender their policy, the insurance company may deduct a fee known as a surrender charge before issuing the payment.
Key Takeaways
- Cash Surrender Value: Money received upon canceling a life insurance policy.
- Cash Value: The equity built up in a life insurance policy from premium payments.
- Deduction of Fees: Insurance companies may deduct surrender charges from the overall value.
- Alternative Options: Policyholders can withdraw or borrow against their cash value instead of surrendering it.
Understanding the Cash Surrender Value
Permanent life insurance policies typically accumulate cash value over time as premiums are paid. This accumulated cash represents a fund that a policyholder can access while they are still living. Should the policyholder choose to surrender their life insurance policy, they will receive a check reflecting their cash value.
Growth Dynamics
In a whole life insurance policy, cash value grows at a guaranteed rate, although the initial years may yield minimal returns compared to the premiums invested. Over time, as premiums are paid, the total cash value—and subsequently, the cash surrender value—increases.
Tax Considerations
When a policy is surrendered, the policyholder can access the total amount paid in premiums tax-free. However, if the policyholder receives an amount exceeding what they initially paid, that excess amount is subject to income taxation.
Cash Surrender Value vs. Cash Value
In the early years of a policy, particularly for permanent life policies, life insurance companies may impose fees known as surrender charges. Thus, the cash surrender value might be lower than the actual cash value balance. The surrender charge can range from 10% to 35% of the policy's cash value, with most policies retiring these charges after a period of 10 to 15 years. Once this surrender period concludes, cash surrender value equals cash value.
Calculating Cash Surrender Value
To determine the cash surrender value: 1. Check the cash value balance. 2. Subtract any applicable surrender charges.
For example, if you have a variable universal life policy with a $10,000 cash value and a 10% surrender fee, you would receive $9,000 upon surrendering.
Cash Surrender Value for Universal and Variable Life Policies
Universal and variable life insurance policies also feature cash surrender values subject to surrender periods. If the policy is surrendered during this phase, surrender charges may apply. After 10 to 15 years, these charges generally cease.
Considerations for Surrendering Your Policy
Pros and Cons
- Pros: Ending the premium payments and gaining immediate access to cash.
- Cons: Loss of life insurance protection; heirs will not receive a death benefit.
Alternative Options
Instead of surrendering the policy entirely, you may consider: 1. Partial Withdrawals: You can take out a portion of the cash value while maintaining the insurance coverage. Withdrawals up to the total premium paid are tax-free. 2. Loans on Cash Value: Borrowing against your cash value allows you to retain the policy. However, interest will accrue on the outstanding loan amount. 3. Using Cash Value for Premiums: The cash value can cover premium payments, but once depleted, it's essential to resume payments to maintain coverage.
Types of Life Insurance with Cash Surrender Values
Common policies with cash surrender values include: - Whole Life Insurance: Provides guaranteed cash value growth. - Universal Life Insurance: Offers flexible premiums and death benefits. - Variable Life Insurance: Cash value is invested in various financial vehicles. - Indexed Universal Life Insurance: Combines the benefits of universal life with potential growth linked to a stock market index.
Making the Decision: To Surrender or Not?
Whether or not to choose a policy with cash surrender value largely depends on your financial circumstances. If you are unable to sustain high monthly premiums and are struggling with long-term savings, a permanent life policy may not be wise.
Selling Your Policy
While selling your life insurance policy (known as a life settlement) is an option, it is not always advisable. This long-term financial choice should be weighed carefully against potential gains and the loss of coverage for beneficiaries.
Conclusion
Cash surrender value is a crucial concept in understanding the financial implications of a life insurance policy. Permanent life insurance policies, including whole and universal life insurance, both build cash value and offer surrender options. If cash is needed, options such as partial withdrawals or loans can maintain policy protection while providing funds. However, surrendering a policy can mean sacrificing death benefits, so careful consideration is necessary.
Financial Advice Disclaimer
This article serves to educate and inform. It does not constitute financial or tax advice. Always consider consulting with a financial advisor to tailor strategies that align with your specific investment needs, risk tolerance, and financial situation. Investing involves risks, including potential loss of principal.