The cash surrender value of life insurance is how much money you’ll receive if you terminate a permanent policy early.
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3,000 Policyholders SurveyedA major feature of permanent life insurance that differentiates it from term life insurance is a cash value component that builds over time. If you cancel your policy early, the cash surrender value is the payout you’ll receive from your insurance company. In this guide, we at the MarketWatch Guides team explain what cash surrender value is and when you might consider surrendering your life insurance policy.
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Permanent life insurance plans such as whole life and universal life typically feature a cash value component. When you make payments on your policy, some of the money goes toward the premium and some goes into a separate savings account. The money that builds up in the savings account is the policy’s cash value. Over the first few years of a permanent policy, the cash value grows relatively slowly. As time goes on, the cash value grows more quickly thanks to compounding interest and dividends.
If you decide to cash out or terminate your coverage early, you will receive the cash surrender value of your policy. The cash surrender value is the amount of money a life insurance plan accrues over time minus any surrender charges, fees or unreimbursed loans. Typical types of life insurance that build a cash value include whole life, universal life, indexed universal life (IUL) and variable universal life. Term life insurance generally doesn’t feature a cash value component or a cash surrender value.
Fees associated with permanent life plans typically decrease with time, so the longer you’ve had your policy, the closer the cash surrender value will be to the accumulated cash value. Whole life insurance policies guarantee cash value growth, but in the initial years of a whole life policy, savings typically bring little return compared to the premiums paid. Some permanent life insurance plans implement a waiting period, or surrender period before you can surrender your policy.
If you terminate your life insurance policy early, your coverage ends and your beneficiaries will not receive a death benefit payout. Instead, you’ll receive the cash surrender value, which calculates the accumulated cash value minus surrender fees and loans or withdrawals you haven’t reimbursed. While some providers offer a lump sum payment when you surrender a policy, others may make incremental payments.
The cash surrender value of a life insurance policy differs somewhat from the total cash value of the plan. The cash surrender value considers not only the total accumulated value of your policy but also the fees and surrender charges that might apply. The cash surrender value is generally tax-free up to the dollar amount a policyholder has made in premiums.
Your cash surrender value is the current cash value of your policy minus any surrender charges and unreimbursed loans or withdrawals. The longer you’ve held your policy, the more surrender fees can decrease and the cash value portion continues to grow on a tax-deferred basis. However, you will owe taxes if the cash surrender value is higher than what you’ve contributed in premiums when you surrender your plan.
For example, let’s say you’ve had a policy for 15 years, paid $50,000 in premiums and built a cash value of $40,000. Because you’ve held the policy so long, you likely won’t have a surrender charge if you terminate your policy early. You also won’t have to pay taxes when you cash out because the cash value is lower than what you’ve paid in premiums. In this case, the cash surrender value is identical to the policy’s cash value, and you’ll receive a $40,000 payout from your provider.
We recommend contacting a financial professional or your life insurance provider to learn more about your current cash surrender value.
There are certain scenarios in which surrendering your life insurance policy might not offer a worthwhile option. Yuri Nosenko, a wealth advisor at Imperial Capital Partners, offers the following insights into surrendering your policy:
“I believe it’s generally better to hold onto a life insurance policy until it matures,” said Nosenko. “However, under certain life circumstances, surrendering a life insurance policy can be worth considering.”
Your insurance company can terminate your policy if you do not pay your premiums — and cash value plans can cost as much as 10 times more than term life insurance policies. According to Guardian Life, a 35-year-old female nonsmoker in very good health could expect to pay about $219 per month for $250,000 in whole life coverage. Our cost data for term life insurance shows that the same 35-year-old female nonsmoker could expect to pay about $20 monthly for a 20-year, $250,000 plan. If your financial situation has changed and you can no longer afford your premiums, you may consider surrendering the policy.
Perhaps you urgently need to access significant cash for an unexpected reason, such as a major health expense or job loss. In this instance, you could surrender your life insurance policy to cover those expenses.
“If you need immediate cash for an emergency and have no other options, surrendering your policy might be necessary,” said Nosenko. Still, Nosenko would strongly advise a policyholder to consider all alternatives before surrendering a policy.
If your life circumstances have changed and the reason you purchased life insurance is no longer applicable, surrendering your policy might offer a solution. For instance, perhaps you purchased coverage for mortgage debt and college tuition for your children if you were to pass away. If you’ve paid off your house and children’s educational expenses, and have significant savings to avoid burdening loved ones with your final expenses, you may explore surrendering your policy.
Surrendering your life insurance policy is a major decision that presents some clear disadvantages.Alternative Options to Surrendering Your Life Insurance Policy
A major drawback to surrendering your coverage is losing the protection offered by the death benefit. Your named beneficiaries will no longer receive the policy’s payout if you pass away. If you don’t have significant savings to cover your debts, your loved ones could have to cover the cost of your final expenses. To put this into perspective, the average funeral cost ranged from $6,000 and $8,000 in 2023.
If you haven’t had your policy long enough to accumulate significant cash value, you could receive little return if you surrender your coverage. If your policy has built limited cash value in the savings portion, you could receive less than you’ve paid in premiums after fees are deducted.
“High surrender charges can significantly reduce the amount you receive,” said Nosenko. “Sometimes, this makes surrendering the policy a futile exercise, as you may end up with much less than what you have contributed over the years.”
Life insurance rates generally lock in when you purchase a policy based on your age and health status. If you surrender your policy and later decide to purchase coverage again, you could face much higher rates or have trouble getting approved because of changes in your age and health.
Surrendering your life insurance policy can have irreversible consequences, as we detailed above. Here are some alternative options you can consider to avoid surrendering your coverage.
Many policies include an accelerated death benefit within the base plan, which allows you to use some of your death benefit early to pay expenses associated with chronic or terminal illness or total disability. Some plans require you to add accelerated death benefits at the time of purchase by adding a rider for an additional premium. If you use accelerated death benefits, the payout to your beneficiaries will be reduced
If you’re having trouble paying the premiums for your current coverage amount, you might attempt to lower your rate by requesting to decrease the policy’s death benefit. Alternatively, you could speak to your provider about changing your policy to “paid-up.” This allows you to keep some of your policy’s coverage amount without having to pay any more premiums. The drawback is the payout to your beneficiaries will likely decrease.
Most permanent insurance policies allow you to take out loans against the cash value or make withdrawals. The cash you take out is tax-free as long as it’s less than the amount you’ve paid in premiums. Your death benefit is reduced if you don’t reimburse a withdrawal or pay back a loan. If you surrender a policy that has unreimbursed withdrawals or outstanding loans, that amount will be deducted from the payout you receive.
