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Life Insurance

Life Insurance Cash Value vs. Surrender Value

Both cash value and surrender value are included in life insurance policies, but differ in what functions they serve for the insured.

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Life insurance policies have both cash value and surrender value features that differ from the face value of a life insurance policy. The face value, also known as the death benefit, is the amount of money your beneficiaries may receive after you pass. Cash value could be used as a savings or investment option that you may withdraw or borrow against in the future. Part of your life insurance premiums go towards the cash value of your policy and helps it grow.

If you need the entire cash value or decide to surrender your policy, you may receive your cash surrender value. The surrender value is the sum of cash you may receive after the surrender fees are in effect. Bear in mind that the surrender value may be lower than the cash value due to surrender charges that have been incurred.

What Is the Cash Value of a Life Insurance Policy?

Accumulating cash value may only occur in permanent life insurance policies, such as a standard universal life policy or a whole life policy. As you pay your premiums for your life insurance, part of that premium gets allocated to the cost of insurance, management fees, and the cash value of the policy.

There are three main types of permanent life insurance:

  • Traditional Whole Life Insurance: Premiums for whole life policyholders will stay level, meaning they will never go up as you get older. The cash value in the whole life policy grows based on a mathematical formula that the insurer determines and may limit how much control you have of the cash value.
  • Universal Life Insurance: Universal life policies allow for flexible premiums in which you may change the death benefit and premiums of your policy at any time. In a universal life policy, cash value grows based on the economy’s current interest rates. As the insured, you have more control over how much the cash value grows.
  • Variable Life Insurance: Variable life insurance is a hybrid between traditional and standard universal life insurance. The cash value in variable life insurance allows you to have more control over how it’s being invested through stocks, bonds, and mutual funds.

The cash value in your policy may be considered a living benefit, which allows you to access the features of your life insurance while you’re still alive. Bear in mind, the cash value in your policy is separate from your death benefit, which means that when you pass, your beneficiaries do not get access to your cash value.

With cash value, you may:

  • Pay premiums with cash value
  • Withdraw your cash value at any time while your policy is active, tax-free
  • Take out a loan against your cash value without it affecting your credit score

What Is the Surrender Value of a Life Insurance Policy?

The surrender value may only occur on permanent life insurance policies. In the case that you choose to partially or fully cash out your life insurance policy, you may receive a surrender value from your policy.

Partially surrendering your life insurance policy is also an option. This may lower the cash value, but it allows you to withdraw cash without terminating your life insurance policy all at once. In comparison, a full surrender of your life insurance may lead you to cancel your life insurance altogether. In doing so, you may receive the cash surrender value that has accumulated over time.

When surrendering your life insurance policy, you may incur surrender fees. A surrender period could last from 5-to-10 years and fees could be higher in the earlier years of your policy.

There are many reasons why the insured would choose to partially or fully surrender their life insurance policy. For example, if you switched jobs and your new job offers you a better rate for life insurance, you may take that offer instead.

Although surrender value is related to cash value, it is not the same thing. The difference is that the cash value shows the overall accumulation of your interest and cash. The surrender value is the amount the policyholder could receive after surrender charges have occurred.

What Is a Surrender Period?

A surrender period is a period of time that life insurance policyholders may have to wait before they can withdraw their cash value without facing any fees. A standard surrender period may last from 5-to-10 years, with its surrender fees being a percentage of the cash value amount. Throughout the years, fees could decline over time.

For example, a 6-year surrender period could look like this:

Surrender Period of Life Insurance PolicySurrender Fee
1 to 3 years6%
4 to 5 years3%
6th year1%
7+ years0%

What Is a Life Insurance Loan?

A life insurance loan allows you to take out a loan from the cash value of your life insurance policy. Differing from surrendering your policy, you must pay the insurance company back with a policy loan. However, you may pay the insurance company back whenever it’s the best time for you. The longer you take to pay off your policy loan, the more interest you may have to pay.

To take out a loan from your life insurance policy, you may need to fill out a policy loan form and specify how much you want to borrow. You may use the loan for your personal needs, such as paying off credit card bills or to use it to repair a car or an appliance in your home. A loan may be beneficial for you if you don’t have an emergency fund elsewhere.