What is the Cash Surrender Value of Life Insurance?

Clock February 07, 2022


If you are searching for ways to cut down on your retirement expenses, canceling an unnecessary life insurance policy or surrendering it for its cash value may be an option you’re exploring. In addition to saving on future premium payments, your universal life or whole life insurance policy’s cash surrender value could provide fast access to cash that can be used for general retirement expenses, existing or anticipated future medical costs, retirement savings, and more.

In this post, we’ll explore this and other options for getting the most value out of insurance policies you may no longer want or need, such as selling your policy in a life settlement. Generally, selling your policy in a life settlement will generate more than its cash surrender value.

Mother and daughter hugging

What is cash surrender value?

The cash surrender value, often referred to as cash value, is the amount the policyowner receives if they surrender a life insurance policy to the insurance company before a death benefit is paid. This is typically equal to the cash value of the insurance policy, minus costs and fees. When you cancel your policy for its cash surrender value, you no longer pay premiums and forfeit any future death benefit.

Permanent life insurances, such as whole life or universal life, can accrue cash value. Cash surrender is not normally included in term life policies, which only offer death benefits. However, some term life policies can be converted into permanent policies, which can then generate cash value.


How is the cash surrender value of a life insurance policy calculated?

There are a number of factors that can influence the amount of a policy’s cash surrender value. For example, the age of a policy may be indicative of a higher or lower value. Older policies have had more time to accrue payments and interest, thereby increasing their value.

Other factors may include the following:

  • Whole life policy vs. universal life policy
  • Amount paid into the policy
  • Market performance
  • Cash surrender charges and processing fees

Cash surrender fees are charged by the insurance company and will be defined by your policy. These fees are normally higher while the policy is young and will go down as time goes on. You can receive specifics on your policy from the insurance company.


How is the cash surrender value of a life insurance policy taxed?

Generally speaking, the cash surrender value you receive from your life insurance policy is not taxable up to the amount that you’ve already paid into the policy. The premiums you have paid until this point have been taxed and will not be taxed again.

However, interest, dividends, and capital gains earned since the policy has been in place could be taxable. You should always consult with a tax professional to determine the nuances of your own situation.


Will surrendering a life insurance policy for its cash value generate the best value for me?

Surrendering your life insurance policy can result in a cash payment to be used toward medical bills, retirement expenses, and any other uses you wish. However, surrendering your policy is not always the method that will result in the highest payout to you. To get the most value out of a policy you’ve been paying into for some time, you should also consider a life settlement.

Typically, a life settlement results in a much higher payout than the cash value received when surrendering a policy back to the insurance company. The National Association of Insurance Commissioners has reported that a life settlement payout is typically four or more times greater than a policy’s cash surrender value. However, final amounts do vary, and each policy is unique and priced individually.


How do I learn more about life settlements?

A life settlement is the sale of a life insurance policy to a third party in exchange for a cash settlement. The sale will result in a large lump sum payment to be used at your discretion. After the sale, the new owner of the policy takes on responsibility for all future premium payments and becomes the policy beneficiary. Visit our life settlements page to find everything you need to know on the topic, as well as how the selling process works.

If you’re interested in selling your life insurance policy, the Lighthouse Life team is here to help. Our life settlement calculator can get you started with a free online estimate. Our team is also ready to answer any questions you may have. Even if you choose not to pursue a life settlement, we want to make sure your questions are answered and you have peace of mind about your policy and your options.


Average rating 5 / 5. Vote count: 8

No votes so far! Be the first to rate this post.