Definition
The cash surrender value is the amount a policyowner is entitled to receive from an insurance company when they decide to surrender a life insurance policy that has an accumulated cash value. This amount is calculated by taking the policy’s cash value and subtracting any applicable surrender charges and outstanding loans along with their accrued interest.
Examples
- Example 1: John has a whole life insurance policy with a cash value of $50,000. If he decides to surrender the policy, and there is a surrender charge of $2,000 and an outstanding loan of $5,000 with $200 in interest, the cash surrender value John receives will be $50,000 - $2,000 - $5,200 = $42,800.
- Example 2: Sarah’s universal life insurance policy has a cash value of $30,000 with no outstanding loans or interest due. If she surrenders the policy and there’s a surrender charge of $1,500, her cash surrender value will be $30,000 - $1,500 = $28,500.
Frequently Asked Questions (FAQs)
1. Is the cash surrender value of a life insurance policy taxable?
No, increases in cash surrender value are not considered taxable income. Also, the cash value received upon surrender of the policy is not taxable income, provided it does not exceed the amount of premiums paid into the policy.
2. What happens to the coverage if I take the cash surrender value?
When you take the cash surrender value, the life insurance policy is terminated, and coverage ends.
3. Why might someone choose to surrender a life insurance policy?
Policyowners might surrender a life insurance policy if they no longer need the coverage, if they need immediate cash for financial reasons, or if they believe they have a better investment opportunity.
4. Are there any penalties for surrendering a life insurance policy early?
Yes, surrender charges and tax implications can serve as penalties for surrendering a policy early. These charges are usually highest in the early years of the policy and decrease over time.
5. Can the cash surrender value be used as collateral?
Yes, the cash surrender value can often be used as collateral for loans.
Related Terms
- Surrender Charge: A fee deducted from the cash value of a life insurance policy when a policyowner decides to surrender the policy before a specified period.
- Whole Life Insurance: A type of life insurance policy that remains in force for the insured’s entire lifetime and accumulates cash value.
- Universal Life Insurance: A flexible premium life insurance policy that accumulates cash value and offers the potential for policy loans and withdrawals.
- Taxable Income: Income that is subject to taxation by income tax authorities.
Online References
- Investopedia: Cash Surrender Value
- The Balance: What is Cash Surrender Value in Life Insurance?
- IRS: Publication 525
Suggested Books for Further Studies
- Life Insurance by Joseph M. Belth
- The Handbook of Life Insurance by Edward E. Graves
- Personal Finance by Jeff Madura
Fundamentals of Cash Surrender Value: Insurance Basics Quiz
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