How Is the Cash Surrender Value Calculated on Insurance?

Understanding the Cash Surrender Value of Your Life Insurance and How It Works

Couple reviewing the Cash Surrender Value of Life Insurance
••• Reviewing the cash surrender value of your life insurance and whether it makes sense to cash out.  Hero Images/GettyImages

Do You Have a Cash Surrender Value Option on Your Life Insurance Policy?

Cash surrender value is the cash value of the accumulated investment portion of a whole life insurance or universal life insurance policy payable to the policyholder upon cancellation of the policy. 

Cashing Out on Your Life Insurance 

When you decide to surrender your life insurance policy, you are essentially requesting to cancel the life insurance in exchange for any cash value that has accumulated, less fees charged by the insurance company. You take the money or cash value in exchange for giving up the right to the "life insurance" or death benefit portion. There are other ways to get cash from your life insurance, without surrendering the policy, as we discuss below.

What Is the Difference Between Getting "Cash Surrender Value" or "Borrowing" From a Life Insurance Policy?

When people, in general, refer to their cash surrender value, they may be referring to one of two ideas:

  • The value of the investments you will get back if you cancel or "surrender" your policy. In doing this, by "surrendering" your policy in exchange for the cash value, you render the life insurance portion null and void. This means your beneficiary will no longer be eligible to receive any death benefit. Instead, you take the cash surrender value
  • The value of cash you can get out of your life insurance policy at any given time, for example, if you decide to borrow money from a life insurance policy. Click here to learn more about borrowing money from a life insurance policy, without canceling the life insurance portion of the policy. This allows you to access the cash surrender value, without losing your life insurance coverage, and it can often be obtained at reasonable interest rates. 

    There is a difference between borrowing money from a life insurance policy, taking cash value out of a policy and the term "Cash Surrender Value". Each of these allows you access to the cash surrender value in different ways. 

    How Does Cash Value Work in a Life Insurance Policy

    In order to understand your cash surrender values, you need to understand how cash values work in a life insurance policy. When you pay your premiums for certain types of life insurance, including: whole life or permanent life insurance, variable life, and universal life insurance, a portion of the payment you make goes to the premium payable for the death benefit and a portion goes into the investment.

    The portion that goes into the savings portion or cash value portion is invested by the insurance company on your behalf. A small portion of your payments also goes into administrative fees to the life insurance company for managing your investments, etc.  

    Term life insurance does not have a cash surrender value.

    How Is the Cash Surrender Value of a Life Insurance Policy Calculated?

    Building cash value in a life insurance policy happens over time, the longer you have the policy and pay the premiums the more opportunity your money has to grow.  

    You can find out the exact cash surrender value of your life insurance policy by asking your financial advisor. or insurance company

    The "Surrender Period"

    Your cash surrender value may amount to very little if you have a fairly new policy because the money hasn't had a chance to build and grow. Most policies will have a surrender period, which is the amount of time you would have to wait before your policy has a surrender cash value. 

    The Cash Surrender Value Is Calculated Using These Factors:

    • How long your policy has been in force and how much you have paid 
    • The performance of the markets for the investment portion of your policy and how the insurance company invested your funds
    • How much the company will charge you in surrender fees

    At the time you purchased your whole life or permanent life insurance policy, you were probably shown a forecast and plan of how that money would grow over time with projected cash values after 5 years, 10 years, and so on. The cash value of your policy may not be very big after only a few years, but it should grow over time.

    The value of the cash depends on the performance of the investments. An insurance company choosing strong investments may yield greater returns on your money.

    What Are Surrender Fees?

    Surrender fees are the charges that your insurance company may charge you for surrendering the policy, withdrawing funds, or canceling the investment portion of the policy before the original agreed upon maturity date under the terms and conditions of the policy.

    The surrender fee is usually highest in the first year and may drop as the policy matures. The fee is charged to dissuade people from breaking the original agreement, allowing the insurance company to have reasonable expectations of the contract and to manage investments based on an expected term. 

    Can You Avoid Paying Surrender Fees?

    Before surrendering your policy, and losing your life insurance coverage completely (the death benefit portion of the policy) find out if you have any option to take a cash surrender value, and possibly use some of it to buy a smaller less expensive policy. Some insurance companies may offer you this option and this may save you some money, while still allowing you to cash out and get a less expensive life insurance policy.

    Why Would You Take Advantage of a Cash Surrender Value on a Life Insurance Policy?

    People may do this because they no longer need the insurance, or because they want to cancel their current policy to buy a new life insurance policy that better suits their current needs in life. In making this kind of decision, it becomes important to review if the cash value you have accumulated in your policy is worth "cashing out" with your financial advisor.