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Cash surrender value of life insurance

You can cancel your permanent policy and collect the cash — but the amount you get may be less than you think.

This article was reviewed by Andrew Flueckiger, a member of the Finder Editorial Review Board and certified insurance counselor and licensed insurance agent in five states.

While permanent policies are designed to last your entire life, you’re free to cancel yours once you’ve built up enough cash value. But once your insurer deducts administrative fees and loans from your cash value, the actual amount you’ll walk away with will be much lower.

What is cash surrender value?

If you surrender your permanent policy, you can collect some of the cash value it’s accumulated over time — minus any surrender fees, charges and outstanding loans. This dollar figure is known as the cash surrender value.

How is the cash surrender value calculated?

The amount of money you’ll get comes down to how long you’ve owned the policy, and whether you’ve dipped into the cash value you’ve built.

Usually, the longer you’ve had the policy, the more money you’ll receive. That’s because your cash value has had more opportunity to grow, and your insurer has made a substantial amount of money via the premiums you’ve paid — so the surrender fees won’t be as high.

But if you’ve taken out loans against your policy and haven’t repaid them, your insurer will deduct those from the final amount. Similarly, if you’ve used your cash value to cover your premiums, your cash surrender value may be lower than expected.

Does term life insurance have a cash surrender value?

No. Term life insurance doesn’t have an investment component, so there isn’t any cash value tied to the policy.

You can cancel your term life insurance policy whenever you want, but you won’t receive any money — and neither will your beneficiaries when you die.

What are surrender fees?

While you’re free to cancel your policy at any time, your insurer will charge surrender fees to help them recoup the costs of selling and setting up your policy. The earlier you cancel, the higher your surrender fee.

If you cancel your coverage in the first two to three years, you can expect to pay steep surrender fees — typically totaling 10% to 20% of your policy’s cash value.

After that, the surrender fees are usually reduced by an annual percentage. For instance, if your surrender policy was 10% in the first year of owning your policy, your insurer might charge 9% in the second year, 5% in the fifth year and 1% in the tenth year.

To confirm your insurer’s surrender fees, read over your policy documents or talk to an agent.

Why are cash value surrender fees so high?

Permanent policies are lifelong contracts — so when you surrender your policy, you’re essentially breaking that contract before the agreed-upon date of maturity.

The fee is highest in the first year, and lessens over time. It’s there for two reasons: To discourage policyholders from canceling their coverage, and to allow insurers to smoothly manage their cash value investments.

What’s the difference between cash value and cash surrender value?

When you pay your premiums, a portion is invested to give your policy a cash value. You can draw from or take out a loan on partial cash value amounts.

If you choose to cancel your policy, your insurer will leave you with the cash surrender value, which is any cash value you’ve earned minus surrender fees and outstanding loans you owe your insurer.

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When is it worth surrendering your life insurance policy?

There are a few situations where canceling your policy and collecting the cash surrender value might make sense, such as:

  • You no longer need life insurance. If you don’t have financial dependents or outstanding debt, you may not need a policy anymore. And by surrendering your policy, you could use the influx of cash to fund your own retirement or cover large expenses, like college tuition or a home renovation.
  • You can’t afford to pay the premiums. If your premiums are too expensive to maintain but you still need coverage, consider switching to a term life policy. But you may need to go through the application and a medical exam again.
  • You have the savings to self-insure. After a few years of climbing the career ladder and building your wealth, you may be in a better financial position than you were when you purchased your policy. In that case, you could use the cash surrender value to boost your already-healthy savings and investment accounts.

What are the drawbacks of surrendering your life insurance policy?

Before cashing in your policy, consider these consequences:

  • You’ll lose coverage. When you surrender your policy, you’re canceling your coverage. This means your beneficiaries won’t receive a death benefit when you die.
  • You’ll be charged surrender fees. The cash value of your policy grows slowly, especially in the first decade. If you surrender your policy too early, your insurer’s fees may eat up a large portion of your cash surrender value.
  • You may have to cough up taxes. Your cash surrender value might be taxed if the amount is larger than the “cost basis” of the policy — which is the money you’ve contributed to the cash value by paying premiums. That amount is classified and taxed as income.
  • You may end up with a lower payout. To get the highest possible cash surrender value, aim to pay off any outstanding loans against your policy before surrendering.

Alternatives to surrendering your life insurance policy

If you need cash but don’t want to surrender your permanent policy, you have options.

Borrow against your cash value

The biggest perk of permanent life insurance is that you can take out tax-free loans against your policy — and your insurer may offer lower interest rates than a traditional lender.

Since you’re borrowing from your own policy, you don’t need to pay back the loan. But if you don’t, you run the risk of reducing your beneficiaries’ death benefit, and your cash surrender value if you end up canceling your policy.

Withdraw money from your cash value

If you don’t intend on paying back the loan, look into a cash value withdrawal. The amount you can withdraw depends on your insurer’s guidelines, but it will likely be less than what you can borrow with a policy loan.

The same drawbacks apply, including lower death benefits. And withdrawals that reduce the cash surrender value of your policy may result in higher premiums. If you don’t pay those premiums within the grace period, your insurer can terminate your policy.

Sell your life insurance policy

Another option is a life settlement, which involves selling your life insurance policy to a third party. That person becomes the new owner of the policy and takes over the premium payments.

The money you’ll receive for your policy is up to the third party, and may be negotiable. But you’ll most likely end up with a dollar figure that’s lower than your death benefit, but higher than the cash surrender value.

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Bottom line

When you no longer want or need life insurance, you can cancel your policy and collect the cash surrender value. While it’s one way to get a lump sum of cash, you may end up paying sky-high surrender fees or taxes on any profits you’ve made.

You’ll also deny your beneficiaries the death benefit. If you still want to leave some money to your loved ones, compare life insurance companies that offer simple term policies.

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