What is cash surrender value (CSV)
– Definition: The cash surrender value is the amount an insurance company will pay you if you cancel a permanent (lifelong) life insurance policy before it pays a death benefit. It represents the policy’s built-up savings component, sometimes called the policyholder’s equity.
– When it applies: CSV exists in most permanent policies—examples include whole life, universal life, variable universal life, and indexed universal life. Term life insurance generally has no cash value.
Key features to understand
– Components: CSV equals the policy’s accumulated cash value minus any previous withdrawals, outstanding policy loans, and any surrender charges the insurer applies.
– Surrender charges: Insurers often impose a fee if you cancel early. Typical early-year surrender charges range from about 10% up to 35% of the cash value and usually decline each year. Many policies eliminate the surrender charge after roughly 10–15 years.
– Guarantees: Whole life policies typically guarantee cash-value growth. Universal and variable products may not guarantee growth; values depend on interest credits or investment performance and can fluctuate.
– Taxes: Returning premiums (your basis) is generally tax-free when you surrender. Any amount received that exceeds your total premiums paid (the gain) is taxable as ordinary income.
– Alternatives to surrendering: You can often take a partial withdrawal, borrow against the cash value (policy loan), or use cash value to pay premiums. Each option has trade-offs for taxes, interest, and the policy’s death benefit.
How to calculate your cash surrender value (step-by-step)
1. Find the current cash value (ask your insurer for the policy ledger or most recent statement).
2. Subtract any prior withdrawals.
3. Subtract outstanding policy loans plus accrued interest on those loans.
4. Subtract any applicable surrender charge for your policy year.
Formula: CSV = Accumulated cash value − Prior withdrawals − Outstanding loans − Surrender charges
Worked numeric example
– Situation: You own a variable universal life policy with a face amount of $100,000. After five years you have built up an accumulated cash value of $10,000.
– Deductions: There are no prior withdrawals, you have no loans, but the policy’s surrender schedule shows a 10% charge this year.
– Calculation:
– Surrender charge = 10% of $10,000 = $1,000
– Cash surrender value = $10,000 − $0 − $0 − $1,000 = $9,000
– Result: If you cancel now, the insurer would pay you $9,000. If you had borrowed $2,000 against the policy, the CSV would be $10,000 − $2,000 − $1,000 = $7,000, and any unpaid loan balance would also reduce the death benefit if you keep the policy.
Practical checklist before surrendering a policy
– Obtain the exact CSV figure and the surrender-charge schedule from your insurer.
– Confirm any outstanding loan balances and loan interest accrual.
– Determine how much of the payout is return of premiums (non-taxable) versus taxable gain.
– Consider alternatives: partial withdrawal, policy loan, or using cash value to pay premiums.
– Evaluate insurance needs: surrendering eliminates the death benefit and any future policy guarantees.
– Compare loss from surrender charges and taxes versus potential long-term benefits of keeping the policy.
– If considering selling the policy (life settlement), research qualified brokers or licensed life settlement providers and understand fees and tax consequences.
When you might prefer alternatives to a full surrender
– Partial withdrawal: Take only what you need; the policy stays in force. Withdrawn amounts up to the premiums you’ve paid are typically tax-free; withdrawing gains can create taxable income and reduces the death benefit.
– Policy loan: Loans are not taxable while outstanding; interest accrues and you choose the repayment timing. Unpaid loan balances reduce the death benefit at death.
– Using cash value for premiums: Insurers commonly allow policyholders to apply cash value to pay premiums. If cash value runs out, you must resume premium payments or risk lapse.
Other considerations
– Early years are when CSV is usually low relative to premiums paid—surrendering early often means significant surrender charges and limited cash returned.
– If the policy’s cash value growth is poor (for non-guaranteed products), the CSV can stagnate and may not support the policy’s cost of insurance; this can lead to premium increases or policy lapse unless you inject additional funds.
– Selling a policy through a life settlement is possible for some older policyholders; rules, costs, and eligibility vary and professional advice is recommended.
Sources for further reading
– Investopedia — Cash Surrender Value: https://www.in
Investopedia — Cash Surrender Value: https://www.investopedia.com/terms/c/cashsurrendervalue.asp
National Association of Insurance Commissioners (NAIC) — Consumer’s Guide to Life Insurance: https://www.naic.org/documents/consumer_guide_life_insurance.pdf
Insurance Information Institute (III) — Understanding Life Insurance Cash Value and Benefits: https://www.iii.org/article/understanding-life-insurance-cash-value-and-benefits
IRS — Topic No. 703, Life Insurance Proceeds: https://www.irs.gov/taxtopics/tc703
Educational disclaimer: This information is educational only and not individualized tax, legal, or investment advice. For decisions about a specific policy, surrender timing, taxation, or selling a policy, consult a licensed insurance agent, qualified tax professional, or fiduciary financial advisor.