Comparing cash surrender value vs. cash value could give you two very different numbers, even if they come from the same policy. This guide explains both figures and what to consider before you decide what to do with your policy.
Cash Value |
Cash Surrender Value |
|
Purpose |
Living benefit, accessible while the policy is active | Exit payout, received only on cancellation |
Amount |
Gross accumulated balance | Always lower, reduced by surrender charges and loan balances |
Access |
Loans or partial withdrawals, no cancellation required | Only available by canceling the policy |
Tax treatment |
Loans are generally not taxable, withdrawals may be | Gain above premiums paid taxed as ordinary income |
Coverage Impact |
Policy stays active | Coverage ends permanently |
What Is Cash Value of Life Insurance?
The cash value of life insurance is a savings component that grows within a permanent policy over the life of the contract. A portion of every premium payment you make flows into this account and accumulates on a tax-deferred basis along with any credited interest, dividends, or investment returns, depending on the policy type. Whole life, universal life, and variable universal life policies all build cash value.
How Cash Value is Calculated
Cash value grows differently depending on which type of policy you have:
- Whole life: The insurer credits growth on a guaranteed schedule set at the time the policy was issued.
- Universal life: The insurer credits interest at a rate that can vary over time based on market conditions.
- Variable universal life: Growth is tied to investment subaccounts you select, so the balance fluctuates with market performance.
As a simplified example, imagine a whole life policyholder paying $3,000 per year into a policy with a 4% guaranteed crediting rate. They would accumulate roughly $36,000 after ten years, including $30,000 of the premiums paid and approximately $6,000 in compounding interest credited over that period.
What Is Cash Surrender Value of Life Insurance?
The cash surrender value of life insurance is what you actually receive if you cancel your policy. It’s not the same as your cash value, though they’re closely related. Your insurer calculates it by subtracting any applicable surrender charges and outstanding loan balances from your cash value, which means the check you end up receiving is almost always lower than the balance on your policy’s statement.
Canceling your policy permanently is the only way to access your cash surrender value. Unlike a loan or partial withdrawal, surrendering ends your coverage and eliminates the death benefit entirely. That makes it a very different decision from simply tapping into the cash value your policy has built up.
How Cash Surrender Value Is Calculated
The surrender charges for life insurance follow a set schedule where they get shorter each year you hold the policy. That’s why surrendering your policy two years in might return close to nothing, but you might get a substantial amount ten years in. Here’s how to calculate surrender value:
Cash Surrender Value = Accumulated Cash Value – Surrender Charges – Outstanding Policy Loans
Using the earlier example, a policyholder with $36,000 in accumulated cash value, a 10% surrender charge, and a $3,000 outstanding loan would receive $29,400 on surrender. The surrender charge alone costs $3,600, and the loan reduced the payout by another $3,000.
Surrender charges typically decrease progressively until they fully disappear 10 or 15 years in. If the previous example had been at year eight or nine, the surrender charge might only be 5%. In that case, the policyholder would pay $1,800 for it instead of $3,600 and walk away with $31,200. If the surrender charge disappears 15 years in, then surrendering at 15 years would give them $33,000.
Cash Value vs. Cash Surrender Value: Key Differences
Both numbers come from the same policy, but they have different purposes and different trade-offs.
Purpose and Uses
Cash value lets you tap your policy’s savings without canceling it, while cash surrender value is what you collect when you give up the coverage entirely.
- Cash value: This is a living benefit you can tap into through loans or partial withdrawals at any point while the policy is active.
- Cash surrender: It’s the lump sum your insurer pays when you cancel the policy. Once you receive it, the coverage ends, and the death benefit is gone.
Payout Amount
The dollar amounts differ even though both figures come from the same policy.
- Cash value: This is the gross amount accumulated inside the policy through premiums, credited interest, and dividends. No deductions apply to this number.
- Cash surrender value: This is always lower than your cash value. What reduces cash surrender value most significantly is the surrender charge schedule, which is why seniors considering whether to sell or surrender their policy often find the secondary market returns more.
When You Can Access It
You can access cash value at any point while the policy is active, but cash surrender value is only available when you cancel it.
- Cash value: You access it through your loans or partial withdrawals without canceling your coverage.
- Cash surrender value: When you surrender a life insurance policy, you receive this amount in exchange for permanently ending your coverage.
Tax Considerations
The tax treatment depends on how you access the money and whether the amount exceeds what you paid in.
- Cash value: Policy loans are generally not taxable while the policy is in force. Withdrawals may trigger a tax liability if they exceed your cost basis.
- Cash surrender value: Any gain above the total premiums you paid is taxed as ordinary income. Your insurer reports the taxable amount on Form 1099-R. How cash surrender value is taxed follows different rules than a loan or withdrawal, so consult a CPA before you proceed.
What It Means for Your Coverage
Accessing cash value leaves your policy intact, but accepting the cash surrender value ends it permanently.
- Cash value: Your coverage stays active, and your beneficiaries remain protected.
- Cash surrender value: The policy ends permanently with no death benefit and no future coverage. Check if you’re eligible for a life settlement before you reach this point.
Thinking About Surrendering? Consider Selling Your Policy Instead
Surrendering is one path, but it doesn’t always return the most. A life settlement may return much more than your cash surrender value. Find out your life settlement value before you decide on either path.
Life Settlement Advisors works exclusively on the seller’s behalf with no upfront fees to help you discover what the secondary market would pay before you make any permanent decisions. Submit your policy for a review, and we’ll evaluate and qualify it for free.
