What is Cash Surrender Value?
Cash surrender value is the amount of cash that a person can receive upon the cancellation of an insurance policy or annuity. This amount is usually associated with whole life insurance policies, which have a built-in savings component. Term policies do not have a cash surrender value.
Understanding Cash Surrender Value
The cash surrender value gradually increases over time, as payments are made into the policy or annuity. The amount of the valuation increase is the excess of payments and interest income over the cost of the life insurance portion of the package (if any). This gives the insured an asset that can either be cashed in later in life, or used as collateral for a loan.
Cash surrender value accumulates on a tax deferred basis until the policy is terminated. At that point, the policy holder is liable for income taxes on that portion of the surrender value that exceeds the amount of the premiums paid in. If the policy termination date is after a person’s retirement date, then the individual’s personal income tax rate should have declined substantially, which means that the associated tax paid on the policy will decline substantially.
