The cash surrender value of a life insurance policy is the amount of money your insurance carrier will pay out in the event you submit a request to surrender and cancel your contract prior to the death of the insured or the maturity date of the life insurance policy.
Permanent life insurance products such as Universal Life and Whole Life (not Term Life) have a cash savings account component where any value not used to cover cost of insurance charges will accumulate and accrue interest and thus will have a cash surrender value accessible to a policy owner. During the earlier years of a life insurance contract, between 10 and 20 years, the insurance company will deduct the corresponding surrender charge listed in the policy from any request to surrender a policy and redeem any built up cash value in the policy account (if any). The surrender charge set by the insurance company acts as an early termination fee for not keeping the life insurance policy active long enough, in the insurance company’s eyes, necessitating a partial recovery of value. The longer a policy is active, the lower the surrender charge until some point in the future where the charge drops to zero for the remainder of the life of the contract.
| Sample Illustration | ||||||
| Age | Year | Premium | Account Value | Cash Surrender Value | Death Benefit | Surrender Charge |
| 70 | 1 | 10,578 | 7,908 | – | 250,000 | (14,473) |
| 71 | 2 | 10,578 | 15,618 | 1,665 | 250,000 | (13,953) |
| 72 | 3 | 10,578 | 23,146 | 9,706 | 250,000 | (13,440) |
| 73 | 4 | 10,578 | 30,640 | 17,708 | 250,000 | (12,932) |
| 74 | 5 | 10,578 | 38,051 | 25,616 | 250,000 | (12,435) |
| 75 | 6 | 10,578 | 45,341 | 33,394 | 250,000 | (11,947) |
| 76 | 7 | 10,578 | 52,470 | 41,003 | 250,000 | (11,467) |
| 77 | 8 | 10,578 | 59,382 | 48,390 | 250,000 | (10,992) |
| 78 | 9 | 10,578 | 66,116 | 55,588 | 250,000 | (10,528) |
| 79 | 10 | 10,578 | 72,605 | 62,538 | 250,000 | (10,067) |
For example, the truncated sample universal life illustration above shows how over time the amount of the surrender charge decreases for the policy owner as they continue to make premium payments and keep the policy active. In each year as the contract continues, the account value builds up as additional funds accumulate and generate interest earnings. In the second year after paying $21,156 ($10,578 x 2) in premiums the policy owner has $15,618 in accumulated account value after deducting cost of insurance charges and adding interest. Should the policy owner choose to surrender and cash out the policy at the end of the first year they would be assessed a surrender charge of $13,953 for early termination resulting in a $1,665 (15,168 – 13,953 = 1,665) cash surrender value. By the tenth year after paying a total of $105,780 in premiums, deducting insurance charges and accumulating interest the account value would total $72,605. Choosing to surrender at that time, the charge would have dropped to $10,067 after ten years resulting in a cash surrender value of $62,538 (72,605 – 10,067 = 62,538) should the policy owner request a surrender at that time.
If you are considering surrendering your life insurance policy for the current cash surrender value you may have other options. One such option is selling your life insurance policy in what is commonly known as a Life Settlement transaction where you may receive up to eight times the cash surrender value for your policy.
Life Settlements are similar in nature to Reverse Mortgages and Structured Settlements where a person who has an asset (in this case the life insurance policy) can sell it for cash now. The buyers evaluate the policy and the insured’s health (no medical exams required) to determine the amount they are willing to pay. The process is simple to get a quote, usually an application is submitted, questions about medical history are covered and some information about the life insurance policy is obtained. With this information, purchasers are able to make an offer for the policy which on average is four to eight times more than the cash surrender value of the life insurance policy, greatly exceeding the amount the insurance companies may offer for terminating the policy early.
