What Is Cash Surrender Value on Whole Life Insurance?

The cash surrender value on a whole life insurance policy is the amount that is paid out if a policyholder terminates the policy. This is typically the cash value with any outstanding loans or fees deducted from it.

Continue reading for a deeper explanation of the cash surrender value, including how it is calculated, its taxability, how you can obtain it, and how you can avoid the surrender charge.

 

Cash Surrender Value Explained

A major part of a whole life insurance policy is the cash value. This is separate from the value of the death benefit, and it encompasses different aspects such as the premiums paid, the interest earned, and any dividend cash values.

The cash surrender value is the amount that would be paid out if the policy were terminated by the owner. In short, this is the net value of any cash assets of the policy with the appropriate amounts deducted.

 

How to Calculate Cash Surrender Value

To calculate cash surrender value, start by determining what the total cash value of the policy is. Many insurance companies have this information freely available to you, or they provide a calculator and itemized inventory of your policy so you can calculate the amount.

Once you have this number start to subtract anything that diminishes that value, including:

  • Outstanding loans on the cash value
  • Surrender charges
  • Premiums left in reserve

The premium deduction is not usually straightforward because premiums are applied per day, so the value is not necessarily what you paid.

Insurance companies may have this information freely available to you, and if you are unsure you can contact the company for assistance.

 

Is the Cash Surrender Value Taxable?

There are certain situations in which the cash surrender value is a taxable amount.

When the policy is terminated or collapses the cash value is locked in. Any amount that is more than the Adjusted Cost Basis (ACB) constitutes a taxable event. The difference is added as regular income in the same year that you begin the policy termination process.

The likelihood of this happening is low. While cash value increases over time, you need to buy into the policy for many years for this taxable event to occur. The policy would need to be incredibly efficient or have an extensive number of premiums paid into it.

 

How to Obtain the Cash Surrender Value

The cash surrender value is attainable in a few circumstances, but they all require the termination of your whole life insurance policy.

You can opt to terminate the policy by completing the appropriate paperwork and process with your insurance company. This is usually done if you need to switch to a different policy or if you cannot continue with the premium payments for your policy.

The cash surrender value is also paid out if you unintentionally end the policy through missed premium payments. Depending on your policy, the cash value may be able to cover the premium for a short while until you can get a handle on payments, but if the amount is insufficient the policy will collapse

 

The Ramifications of Surrendering Your Policy

Surrendering your whole life policy is not a decision to be made lightly, and you should always contact an advisor when you can.

The most obvious effect is that you will no longer have life insurance coverage. If you die before you can secure a new policy then your beneficiary will not receive a tax-free death benefit, and many costs will not be covered in the same capacity.

If you develop health issues before securing a new policy then you risk losing the chance to be covered by life insurance at all.

You no longer have an account that grows passively, and the cash value you could once tap into is no longer available. Any dividends that were waiting to be paid for the year that you terminated will be forfeited back to the company.

 

Alternatives to Surrendering Your Whole Life Insurance Policy

Instead of surrendering your whole life insurance policy and settling for the cash surrender value consider these alternatives.

 

Adjusting Your Policy

In most cases, the surrender fee is charged on a universal whole life policy. These policies are much more malleable than other whole life options, and they allow you to adjust your coverage as needed.

Taking the time to meet with your advisor and/or your insurance company to manipulate the terms of your coverage can provide you with coverage that is more appropriate for your situation.

If your motivation for terminating the policy is related to premium cost, consider reducing the coverage until you reach a cost that you can handle.

 

Taking Action to Keep the Policy Active

If you can adjust your premium then you should be able to find a position where it is easy to keep your policy active.

If not, check to see if the policy will automatically borrow from the cash value. If this is not the case, you may need to dictate that this scenario is allowed, or you may need to take a loan out and manually use the value to cover premium costs.

 

Can You Avoid Surrender Charges on Whole Life Cash Value?

The surrender charge that leads to a lower surrender cash value tends to be higher earlier on in the policy. It takes about ten years for the price to drop, and it can even disappear after this period.

The easiest way to avoid the surrender charge is to make sure you understand its terms in your contract. Make sure you verify the existence of a surrender charge (some policies may not have one) and double-check the amount or how it is calculated.

Most surrender charges drop off, so finding a way to stretch to the drop-off point may save you more money in the long run.

 

Final Thoughts

The cash surrender value of a whole life policy is an important aspect that many avoid because it can be difficult to calculate. An experienced advisor like Sim Gakhar can explain this value in easy-to-understand terms and help you find a policy that is favorable to your needs.

 

FAQs & Helpful Resources Regarding Whole Life Insurance