What Is the Cash Surrender Value of Life Insurance?

When you sign up for permanent life insurance, you’re planning on paying a premium for a policy until the day you die. Part of the premium gets set aside as a cash value. But what if you change your mind? What happens if you want to cancel the policy? Can you get that money back? If so, what are the consequences?

We’ll explain, step-by-step.

Permanent life insurance comes with a cash value, a sort of savings account that can be invested in many ways. Let’s say you’ve been paying your permanent life policy for 10 years and now you want out. The cash value that’s been saved is yours, but you might have to pay a fee. What’s left is the cash surrender value.[1]

The cash surrender value of a life insurance policy is the cash value of the policy minus the surrender charge, which is usually expressed as a percentage.

That seems simple enough, until you realize the surrender charge is usually a (relatively) short-term fee. Most universal life insurance plans only have a surrender charge for the first 10 to 15 years, according to insurance planning consultant Michael C. Staeb.

Once the surrender charge goes away, the cash surrender value of life insurance is equal to its cash value. So, if you wait out the fee term, you can get everything you put in and any interest. Some cash value policies may result in you losing money, however, so you might actually get less than you put in.

Generally speaking, permanent life insurance, which lasts for your whole life as long as you pay premiums, has cash surrender values. Term life insurance, which lasts for a given time frame, usually 10 to 30 years, does not have cash surrender values.

There may be exceptions.

"In some business-owned life insurance products, they will have a waiver of surrender charge," Staeb says.

A policy with a cash surrender value is a good option for someone who wants flexible coverage. If you decide to quit your policy, you know you'll at least receive the cash surrender value of your policy. This can be an appealing option if you suddenly need money for another purpose, like an unexpected tax bill or a medical expense.

Keep in mind that when you stop paying the policy and get the cash surrender value, you no longer have life insurance.

Assuming you can wait until you're older and the policy has accrued a substantial cash value, you could gain access to a big chunk of change by canceling a life insurance policy while you’re still alive–this assumes you no longer have dependents who need the cash, or there’s a good enough reason for you to pull out of the policy.

If you have dependents who need income after your death, such as an adult child with a disability or mental health disorder, it is generally not recommended to cancel your policy and take the cash surrender value. In this case, the best option is to keep up with payments and make the adult child your beneficiary, so they will receive the death benefit when you die.

Your policy documentation will note the percentage for a cash surrender value and the duration of the surrender period in terms of years. Your policy will also list any other fees the insurer deducts.

If you are outside the surrender period, you’ll receive the entire cash value. If you are inside the surrender period, you’ll receive the cash value minus the surrender value. The examples above help illustrate how to calculate cash surrender value of life insurance.

Assume a policy has a cash value of $15,000 and you’re considering canceling it. Here’s how much you would get back based on the cash surrender value:

With a cash surrender value of 15%, you’d receive $12,750

With a cash surrender value of 20%, you’d receive $12,000

With a cash surrender value of 30% you’d receive $10,500

• How do you determine the cash value of life insurance?

The easiest way to get the up-to-date cash value of life insurance is to contact your insurance agent or the insurance company.

• What happens if I surrender my whole life insurance policy?

Surrendering your policy cancels life insurance coverage, so you no longer have benefits. You’ll receive the built-up cash value, minus the surrender charge (if applicable).

• Is the cash surrender value of life insurance taxable?

This depends. If the cash surrender value is less than you've paid in policy premiums, you won't owe taxes. If the cash surrender value exceeds policy premiums, you'll be taxed.[2]