Cash Surrender Value of Life Insurance: How Does It Work? (2024)

FAQs

Cash Surrender Value of Life Insurance: How Does It Work? ›

How does it work? Cash surrender value is the actual amount of money you will receive if you choose to terminate a permanent life insurance policy before its maturity date, or before you die. That value differs from your life insurance policy's cash value which is the total sum compiled in your policy's cash account.

The biggest benefit of surrendering a life insurance policy is receiving a lump sum payout of the surrender value. You can use this money as you like, whether you need to pay off debt or want to put it into savings.

You can access your cash value in three ways: (1) borrowing against the policy (you'll have to repay with interest), (2) withdrawing some of your money, or (3) canceling the policy to receive the surrender value.

The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.

Examples of Cash Value Life Insurance

An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.

You won't be taxed on the entire surrender value, though. You'll be taxed on the amount you received minus the policy basis, or the total premium payment you made on the policy. This taxable amount reflects the investment gains that you took out.

Why? First up, you're going into debt, which is never a good idea. Second, you'll have to pay interest on the loan, and if you don't pay all of it back, your death benefit will decrease. Think about how crazy this is—you're paying interest on a loan made up of your own money.

Cash surrender value is money a life insurance policyholder receives for canceling their policy before it matures or they pass away. This cash value is the savings component of most permanent life insurance policies, such as whole life and universal life. It is also known as policyholder's equity.

Similar to ending a life insurance contract with an outstanding loan balance, there are tax implications on any cash value proceeds above cost basis if you surrender your policy.

Cash surrender value is the actual amount of money you will receive if you choose to terminate a permanent life insurance policy before its maturity date, or before you die. That value differs from your life insurance policy's cash value which is the total sum compiled in your policy's cash account.

How fast does cash value grow in life insurance? ›

How fast does cash value build in life insurance? Most permanent life insurance policies begin to accrue cash value in 2 to 5 years. However, it can take decades to see significant cash value accumulation. Consult a licensed insurance agent to understand the policy's cash value projections before applying.

How long does it take to borrow against life insurance? It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return.

How much can you sell a $100,000 life insurance policy for? On average, you can expect to receive 20% of the policy's face value when you sell it, according to the Life Insurance Settlement Association (LISA). That means a $100,000 life insurance policy might sell for $20,000. However, this is only an average.

What happens to the cash value after the policy is fully paid up? The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums.

Withdrawal or loan may not be an option: You can't access money from your whole life policy unless there is sufficient cash value in your account, which takes time to build. If you need money shortly after enrolling in your policy, you may not have the accumulated funds to borrow or withdraw.

If you've built up a sizable cash value, you may also choose to take out a loan against your policy. Life insurance companies often offer these cash-value loans at interest rates lower than a traditional bank loan. Of course, you're not obligated to pay back the loan since you're essentially borrowing your own money.

Under the cash surrender option, the policy is surrendered and the insurer simply pays the cash value to the policyowner in a lump sum. At that point, the policy is canceled, and the insurer's responsibility under the terms of the contract ends. Surrendered policies cannot be reinstated.

Withdrawing or reducing your cash value can lead to a lower death benefit—less money for your beneficiaries—and potentially a policy lapse, leaving you with inadequate coverage. Before cashing out your life insurance policy, it's vital to consider your unique financial situation and needs.

B. Coverage ends and the policy cannot be reinstated. Once the cash surrender value option is selected, the coverage is terminated and the policy cannot be reinstated.