Permanent life insurance is a lifetime investment in the future for you and your loved ones. But if you need to surrender your policy for any reason, it’s important to know exactly how much you could walk away with.
Here’s how to calculate the cash surrender value of your life insurance policy.
What is life insurance cash surrender value?
If you have a permanent life insurance plan, such as whole life or final expense, your policy comes with an additional feature called cash value. When you purchase a policy, a percentage of the premiums you pay each month or year is set aside to build over time as your policy matures.
Cash value also earns interest over time in an, account that you can borrow from if necessary.
If you find that your circumstances have changed, or that you are simply in need of the money immediately, you may decide to “surrender” your permanent insurance policy. Each provider offers a surrender period for permanent policies. If you end the policy within that period, you may have to pay additional fees or penalties.
How much is my policy’s cash surrender value worth?
Your permanent life insurance surrender value depends on a few different factors:
- Total cash value of your policy
- Any surrender penalties for your policy
- Your policy’s surrender period
When you first apply for a policy, your provider will calculate your surrender period and penalties based on factors like your coverage amount, eligibility, and rating class. The penalty associated with surrendering your policy depends on the insurance provider. Generally, these penalties or fees will add up to a percentage of the total cash surrender value. Over time, the surrender charges generally decrease, so that eventually you’ll have fewer penalties to pay if you choose to surrender your policy.
How to calculate cash surrender value
If you decide to surrender the policy, calculating cash surrender value starts with assessing the current amount of cash value your policy has accumulated. If you’ve only had the policy a few years, for example, the total cash value is likely to be less than if you’ve held the policy for several decades. The insurance company will then subtract the fees from your total cash value to get the final net cash surrender value. It’s also important to assess any tax implications, as we detail below. That means the formula for calculating life insurance cash surrender value is:
Cash surrender value = current cash value – fees – taxes (if applicable)
Be sure to talk to your insurance agent about how cash value surrender works for your policy and have them walk you through your surrender period and penalties.
How is cash surrender value of life insurance taxed?
Cash value is not considered taxable while it remains part of your life insurance policy. Once you begin the process of surrendering your policy, however, that can change.
In many cases, the IRS considers cash surrender value as a tax-free return of your premium payments. If your net cash surrender value after penalty fees adds up to more than you’ve paid in premiums, however, the remaining amount could be considered taxable income.
For example, if you’ve paid $5,000 in premiums over five years, you won’t have to pay any taxes on cash value up to $5,000. But if you’ve paid $5,000 and accumulated $7,000 in cash value, $2,000 will likely be considered taxable income.
Alternatives to surrendering a permanent life insurance policy
Before surrendering your policy for cash value, it’s important to keep your other options in mind:
Take out a loan.
If you are still within the surrender period, you can also take out a loan on the total cash value of your policy. This would give you the entire cash value upfront without losing your policy, but you would be required to pay interest. You can then choose to pay the full loan back to your insurance company, or pay just the interest and have the loan deducted from your death benefit after you pass.
Pay premiums using cash value
Sometimes, the inability to keep up with premium payments is the reason for considering surrendering a life insurance policy. Yet, if you’ve had your policy for long enough to accrue significant cash value, you may be able to tap into the account to pay for premiums. That way, you get to keep the protection of the death benefit and have a reprieve from needing to pay premiums until your financial situation changes.
Consider switching to a term life insurance policy instead
If you haven’t purchased a policy yet, consider buying more affordable term life protection instead. While permanent insurance offers a safety net for both you and your loved ones after you’re gone, higher premiums can leave you struggling to keep up with permanent policy payments. Term life offers flexible protection for up to 30 years with a guaranteed death benefit if you die while the policy is active. With no additional cash value, it’s also a more affordable option, so you can help ensure that your loved ones are taken care of if something happens to you.
Sell your life insurance policy
Some companies will offer to buy a permanent life insurance policy for cash. However, companies often try to pay much less than the policy’s death benefit would be worth. In turn, you will no longer own the policy and not have access to either the cash surrender value or death benefit for your loved ones. Depending on financial needs, selling a policy may make sense in certain instances, like if someone is diagnosed with a terminal illness and needs to pay for expenses immediately. Before selling a life insurance policy to any company and surrendering cash value, it’s important to talk to a financial professional to ensure it makes sense.
Still have questions about life insurance cash surrender value?
At Fidelity Life, we’re here to help make life insurance simpler for everyday families. Get in touch with us to speak with an agent today.
At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.
