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Surrender value of life insurance

Fact-checked with HomeInsurance.com

Life insurance policies offer surviving beneficiaries financial peace of mind in the event the policyholder dies. But what happens if life insurance is no longer needed, or a policyholder needs to pull money from their policy? When enrolling in a life insurance plan, it’s equally as important to understand the policy’s death benefits as it is to understand what happens if your policy is voluntarily terminated. For this reason, it’s essential for policyholders to know what the cash surrender value of their policy is.

What is cash surrender value?

Within your life insurance contract, you’ll likely come across the term “cash surrender value” in reference to your policy. This refers to the total sum of money a policyholder will receive if they need to access the cash value of their policy. Also known as “surrender value” or “annuity surrender value” if you’re dealing with annuities, this sum should not be confused with the policy’s actual “cash value.” The difference between your policy’s surrender value and cash value is outlined below:

  • Cash value: The sum of money held in your policy’s account that builds over time through premium payments.
  • Surrender value: The sum of money a policyholder receives if they attempt to access the cash value of a policy by terminating it or cashing it out.

Surrender values may be lower than the cash value of your policy since insurance companies apply what are known as “surrender fees” when a policyholder attempts to withdraw from the account. Since surrender values are tied to your premium payments, the value may fluctuate throughout the duration of your policy.

How does cash surrender work?

If you hold a whole life insurance policy, a portion of the premium payments you make each month will go toward purchasing the death benefit while the rest contributes to the cash value of your account. The idea is that by entering into a contract with your life insurance provider, you are committing to paying that premium for the duration of your policy with the understanding that your carrier will pay out the benefit in the event you die. However, this account also acts as a form of protection in the event you choose to breach your contract with your provider by voluntarily terminating the policy.

If you choose to terminate your whole life insurance policy, you will be obligated to pay for the insurance carrier’s damages incurred as a result of your breach of contract. These “surrender fees” are taken from the contributions you made to the cash value of your policy’s account. Once the insurance company is made whole, the remaining balance (the surrender value) is paid out to the policyholder.


  • Policy Type: Whole life, universal life, and variable universal life insurance policies usually offer cash value options for policyholders. However, term life insurance products and certain types of whole life insurance plans may not offer guaranteed cash value, so be sure to read the terms of your contract carefully to understand your options.
  • Surrender Period: Most insurance carriers impose a surrender period of two to three years for their policyholders. This ensures that policyholders have had enough time to accumulate enough value within their accounts to cover any costs associated with terminating their policy in the event they wish to access the cash value.
  • Policy Borrowing: In some cases, insurance companies may allow policyholders to borrow against their policy’s cash value. This provides a tax-free avenue for policyholders to access the cash they need while they are still living without having to terminate their policy.

How to calculate your policy’s cash surrender value

In order to calculate your life insurance policy’s cash surrender value, you first need to consider the following:

  • How long has your policy been in effect and how much have you paid thus far?
  • What type of insurance policy do you have?
  • Has your insurance company invested any portion of your premium payments?
  • What has the market performance been like for any investment portions specified in your policy?
  • How much will you be charged in surrender fees for accessing the cash value of your account?

Taking all this information into account, you’ll be able to gain a better understanding of what the potential surrender value may be. The easiest way to calculate your policy’s cash surrender value is to subtract any surrender fees or policy loan interests and balances from the cash value of your account. Alternatively, you can contact your insurance agent to get an exact answer as to what the surrender value for your policy will be.

Is cash surrender value taxed?

The cash surrender value of your policy is only taxed on any growth to the account. Life insurance companies have preferred tax treatment for money withdrawals, known as FIFO (first in first out). That means that policyholders can withdraw their policy’s surrender value tax-free up to the amount they contributed to the policy. For example, if you pay $50,000 into a whole life insurance policy after five years, you can withdraw up to $50,000 from your cash value tax-free since you paid that amount in premiums over the past five years. Any additional moneys in the account that are a result of interest accrual will be taxed if you choose to withdraw them.

The takeaway

  • Life insurance policyholders that have certain types of cash-value-generating policies may receive the cash surrender value if they terminate their policy.
  • Cash surrender value is the amount the policyholder receives after voluntarily terminating their policy, less any surrender fees, taxes, and damages owed to the insurer for breach of contract.
  • Some insurance companies may allow their policyholders to borrow against their cash value on a tax-deferred basis.
  • Taxes are applied to the cash surrender value of your policy only on the amount withdrawn which exceeds the total amount the policyholder contributed through premium payments.

The cash surrender value of your life insurance policy can be withdrawn from your account only after you voluntarily terminate the policy once you’ve reached the end of your surrender period. Once you choose to cash out on your policy, the insurer will apply the necessary surrender fees and any taxes to funds withdrawn that are more than the amount the policyholder contributed. Deciding whether or not to cash out on your insurance policy can be a difficult choice to make. When in doubt, always consult with your financial advisor or insurance agent to understand what the best option is for your specific circumstances.

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