What Is Cash Surrender Value of Life Insurance?

The amount of money you might get if you decide to cancel your life insurance policy is known as the cash surrender value (CSV). However, not all life insurance policies offer it.

Term life insurance policies do not often include cash surrender value; but whole life, universal life, and variable universal life insurance do.

What Does a Life Insurance Policy's Cash Surrender Value Mean?

Permanent life insurance products (such as whole life and universal life) offer protection over your entire life and help you develop a cash reserve fund, in contrast to term life insurance policies, which typically last 10 to 30 years and only pay death payments. Your premium, the number of years your policy is in effect, and the current standard interest rate your policy generates will all affect how much cash value you gain.

The cash surrender value is the amount you would get back if you cancel your life insurance policy, less any surrender charges. Depending on the insurer, surrender fees can range from 10% to 35% and are frequently higher. Usually, these costs will come down with time. You might get a less or no death benefit if you cancel your insurance, but you won't have to pay any more premiums.

A portion of the money you pay as premiums for a permanent life insurance policy goes toward your death benefit, another part covers any necessary expenses, and the remaining amount is deposited into the cash value section of your account. Remember that if your policy is new, the cash value you receive upon cancellation will probably be relatively low. That's because the policy's cash value component hasn't had time to build up.

Cash Value vs. Cash Surrender Value

It's essential to understand the distinctions between cash value and cash surrender value if you're considering canceling your cash value life insurance policy.

Value of Cash Surrender

When you cancel or surrender a life insurance policy or annuity, the amount you receive is referred to as the "cash surrender value," less any surrender costs and any money required to settle loans or unpaid premiums. It may also be known as the annuity surrender value in the context of annuities.

Cash Price

The funds and accrued interest stored in your account under your permanent life insurance policy or cash-value-generating annuity are known as cash value or account value. You can raise your death benefit with this money, take partial withdrawals, or take out loans secured by the cash value.

Exactly how is the cash surrender value determined?

Your surrender period will be determined by the insurance company when you apply for a permanent life insurance policy based on your eligibility, the amount of coverage, and the rating class (such as "preferred plus" or "preferred best").

Your insurer starts by examining the current cash value in your account before calculating your cash surrender value. They may deduct surrender charges or other unpaid balances to determine your ultimate net cash worth.

Take out a $250,000 universal life insurance policy as an illustration. You accrue a cash value of $25,000 over ten years of payments. Your insurer assesses a surrender fee of 2% of the cash value. This means that if you surrender your policy, you'll pay a cost of $500 and receive $24,500 in cash value.

Do You Want to Give Up Your Life Insurance Policy?

Sometimes it seems sensible to surrender your life insurance coverage.

• You change jobs, and your new employer provides free or heavily discounted life insurance.

• You wish to convert your whole life insurance to a term life insurance policy.

• Either your rating class changes, or you want to change insurance carriers.

• Since you need money quickly, your options are limited.

There are other circumstances in which giving up your policy might not be the wisest move.

• The policy hasn't been in force for very long and hasn't built up much monetary worth.

• Your premium payments are past due.

• Because your coverage is so recent, surrender costs are significant.

• Your death benefit is forfeited.

You might wish to consider other choices instead of canceling your coverage.

Partially withdraw your funds: You could take a portion of the cash value in your account if you need money for an unanticipated emergency but don't have an emergency fund set up. If you are no longer able to pay your premiums, you can also use the withdrawal to do so.

Remember that this will probably reduce your death benefit.

Sell your insurance: You can decide to attempt selling your policy to a third party for a one-time cash payout if you can no longer afford it. Following the sale, the third party takes on premium payments and is named as a beneficiary on the insurance policy. When you pass away, they also get the death benefit.

Obtain a loan: Taking out a policy loan using your policy as collateral is another option for giving up your life insurance coverage. Your death benefit will be reduced if you have any outstanding debts at the time of your passing.

For What Matters in Life

To ensure your family is taken care of after your death, getting a life insurance policy is crucial. After deducting surrender costs, the cash surrender value is the amount you would receive if you willingly cancelled your insurance.

If you're considering surrendering your life insurance policy for the cash surrender value because you can't afford the premiums any longer or you need the money for an urgent expenditure, think about the cons first because it could lower or even eliminate your death benefit.