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

Feb 16, 2021 4 min read Riley Adams, CPA

Key takeaways

  • Cash surrender value is the amount left over after fees when you cancel a permanent life insurance policy (or annuity).
  • Not all types of life insurance provide cash value.
  • Paying premiums could build the cash value and help increase your financial security.


People have many options when it comes to securing their loved ones' futures in the event of their death. You may have heard of "cash value" and "cash surrender value" when discussing them. But what do these values mean, how are they determined, and how do they work? Here are some answers.



What is cash value for life insurance?

As you pay premiums on a permanent life insurance policy, you can build cash value—a kind of separate account within the policy (or an annuity).1 To help it grow, after policy charges, your provider sets aside a portion of your premiums into the separate account, which can earn interest.

Permanent life insurance generally stays in effect for as long as you pay your premiums. This differs from term policies, which don't build value and typically last for set periods like 10, 20 or 30 years. (After that period, you can continue the policy but likely will pay more each year—most term policies feature “level” premiums—as you age).

You can use your cash value by borrowing against it, withdrawing some of it, or withdrawing it all at once and surrendering the policy. (Withdrawals over the amount of premiums paid are usually taxable.) Also, you can use permanent life insurance to build tax-deferred value to help supplement your retirement income.

These features make permanent policies more expensive than term insurance with similar coverage amounts—but the cash value could help the policies pay for themselves over time.


Cash value vs. cash surrender value

Cash value can build as you pay premiums and the insurance policy’s (or annuity’s) account value is credited interest. If you need to use all of your cash value at once, you must either borrow against it (and repay the loan with interest) or cash out entirely.

When you cash out, you “surrender” the policy or annuity, which could result in surrender charges. The remaining balance—cash value minus surrender charges—is your "cash surrender value."

Cash value and cash surrender value can be the same amount if you've held the product for long enough, but they often differ due to fees. (You should calculate the surrender fees if you no longer need your policy and are thinking of using the money. Life insurance policies are intended to be held for the long-term.)

Also, surrender value differs slightly for insurance policies and annuities:

  • Permanent life insurance—

    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.
  • Annuities—

    Depending on how long you've owned an annuity, getting your cash value may carry different charges. This will be determined by whether you want to make a full or partial surrender. Also, you may pay withdrawal fees based on your age. An annuity's surrender value is the total of payments you've made plus any investment gains or interest, minus prior withdrawals or outstanding loans.


What kinds of life insurance have cash surrender values?

Unlike term life insurance, permanent life policies include a cash value that you can tap through policy withdrawals and loans. For example:

  • Universal life insurance

    policies don't expire (as long as you pay required premiums and meet other conditions). They also have flexible premiums and death benefits (the amount beneficiaries receive if you die). Their cash values earn interest based on market rates or a minimum rate stated in the policy—and you may be able to access some of that cash value without diminishing the policy's original death benefit (aka “face value”).
  • Whole life insurance

    —This type of policy also can last your entire life, but the premiums are fixed. As you make payments, your cash value should grow. If you want to access your full cash value and cancel your policy, you will receive your cash surrender value. (Of course, that would defeat the main purpose of buying life insurance: to help secure your loved ones' futures if you should die.)


Do you need a policy with cash value?

Cash value builds over time, increasing your net worth and financial security. Even so, the policy's costs can reduce your gains, and the amount of risk you take on depends on the kind of policy you buy. Term life insurance—which pays a death benefit but typically ends after a set period and doesn't grow in value—is often enough for most situations. But if you've maxed out your retirement accounts, met your other financial needs, and want coverage and other benefits for the long term, consider a permanent life policy.


What you can do next

Whether you have a policy with cash value or are considering one, speak with a financial professional who can guide you in choosing coverage or making the most of the insurance you already have.



1Important: With permanent insurance, amounts you withdraw above the premiums you’ve paid are generally taxable. When a policy lapses or is surrendered, any outstanding loan balances will be taxed immediately up to the policy’s remaining cash value. Unpaid loans and withdrawals reduce the cash value and death benefit (potentially including the policy’s face value); may shorten the duration of any guarantee against lapse (which could lapse the policy itself); and may have tax consequences.


Riley Adams, CPA, is a senior financial analyst at Google with over a decade of professional experience. He has written for MarketWatch, Kiplinger, MSN, Yahoo Finance, Morningstar and TDAmeritrade, as well as his own personal finance website.


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