Cash Value vs. Surrender Value: What’s the difference? | SelectQuote (2024)

FAQs

Cash Value vs. Surrender Value: What’s the difference? | SelectQuote? ›

That value differs from your life insurance policy's cash value which is the total sum compiled in your policy's cash account. Your cash surrender value is the amount of cash you've built, minus any surrender charges or fees.

The cash value of a life insurance policy refers to its overall value of the savings portion of your policy that accumulates over time. The surrender value is the dollar amount you actually receive if you choose to terminate your policy, which is typically the cash value minus any surrender fees.

Selling a whole life insurance policy in a life settlement is a strategy to get far greater returns than a surrender. On average,every $100,000 in life insurance policy value will only gain back $460 in surrender value. This means even a $1 million whole life policy will be surrendered for around $4,600 in cash.

In many cases, you can make a direct withdrawal from your cash value. You may have to leave a specified amount of it in place but might be able to withdraw and use the rest. Keep in mind that the money you take out may be deducted from your death benefit, leaving your loved ones with less after you pass away.

Most whole life insurance policies mature at 121 years, although some mature at 100 years. Say, for example, that you purchase an insurance policy with a face value of $10,000. Once the policy matures, the cash value of the policy should equal $10,000.

How much money will I get if I surrender my LIC policy? In case you surrender your LIC after 3 years, your surrender value will be approximately 30% of the total premiums paid. However, the premium paid for the first year and the premiums paid towards accidental benefits coverage riders are excluded from it.

For example: A life insurance policy of $25,000 has a face value of $25,000. It is typically the amount of money the insured's beneficiary will receive if the insured dies while the policy is in force. However, there are times where the face value of policy and its death benefit may differ from each other.

In most cases, your policy's cash surrender value will be paid in a lump sum. Depending on your policy, however, you may receive periodic payments over time.

Higher the period of holding, higher the percentage you get as surrender value. Converting it to paid-up at this stage will cause you further loss when you factor in inflation. The sum you receive at the maturity of the policy may have no significant value at that time.

"When cash is taken out of a policy it will reduce the amount of death benefit, and if too much cash is taken out of a policy it might eventually not be able to remain intact, or "in force," in life insurance language," Teitelbaum says.

Why is my cash surrender value so low? ›

The surrender fees will reduce your surrender value. These costs and the policy's surrender value can fluctuate over the life of a policy. After a certain time period, the surrender costs will no longer be in effect. At this point, your cash value and surrender value will be the same.

Is the cash surrender value of life insurance taxable? A life insurance policy's cash surrender value can be taxable. Any amount you receive over the policy's basis, or the amount you paid in premiums, can be taxed as income.

Though they are tax-advantaged, policy loans and withdrawals do have one major downside: The more you take out, the less your beneficiaries will receive.

If you decide to cancel whole life insurance or another permanent life product, you could receive a payout based on the cash surrender value. Surrender charges: Be mindful that surrendering your policy, particularly in the early years, often incurs surrender charges. These fees will reduce the amount you receive.

That means if your policy has a $100,000 benefit, you might receive $20,000 from selling it. Life settlement companies base their offers on many of the same factors life insurance companies use to determine your premiums.

Surrender value in term insurance refers to the amount of money an insurance company pays to the policyholder if they decide to terminate their policy before its maturity. It applies only to those term insurance policies with a surrender benefit.

Fortunately, it's easy to calculate your cash surrender value. First, add up the total payments you've made toward your life insurance policy. Then, subtract the surrender fees your insurance company will charge. You'll be left with the actual payout you may receive if you terminate or surrender your life insurance.

Just like policy loans and the surrender value, the IRS only taxes you on distributions you make above the amount you've paid into your cash value through premiums. That means if you have $20,000 of cash value and earned $1,000 of that in interest or investments, you could take out $19,000 tax-free.

A special surrender value is determined by (Initial base sum assured times (Premiums paid minus Premiums payable+ Bonus) + surrender value factor). If premiums are stopped after a certain period, the policy continues with a lower sum assured. We refer to this sum assured as the paid-up value.