What is Cash Surrender Value of Life Insurance?

Thang Truong
Thang Truong
Updated on:

One of the lesser-known components of life insurance is the cash surrender value. However, it’s still a key component. This is the amount of money that you get at certain points in the policy if you cancel. Below we’ll cover more in-depth on what you need to know about the cash surrender value of life insurance, such as when it makes sense to use it and examples of specific values.

What is Cash Surrender Value of Life Insurance?

Simply put, the cash surrender value in the amount of money that a policy pays out if you cancel that policy in a certain timeframe.  

These are different from surrender charges, which is the amount of money that you are charged if you cancel the policy. Typically, a surrender charge is a percentage of the cash value.

These are interrelated concepts, however. Often, the surrender value you get is after the surrender charges are applied. The cash surrender value of life insurance is often calculated with administrative costs and surrender charges in mind.  

If you have a term life insurance policy, there is no surrender value. If you cancel your term life insurance by simply stopping paying premium, you receive $0 from your insurance company.

Surrender value only applies to life insurance with cash value account such as whole life, universal life, indexed, and variable. There is usually no surrender value in guaranteed universal life insurance with some exceptions, which we will provide an example below.

Examples of Cash Surrender Value of Life Insurance 

Let’s review an illustration of a variable life insurance policy by Prudential. This policy is for a 37-year-old female, let’s call her Susan, who wants to set aside $8,000 a year to 54 years old (18 years) in a life insurance policy with a goal to maximize supplemental retirement income when she reaches 55 years old. Prudential Custom Premier II, a variable universal life insurance policy, in its illustration, would allow her to withdraw $19,710 from the policy from year 19th (55 years old) to year 30th (66 years old) of the policy. Below are the surrender value of her policy:

  • 5th year: $29,008
  • 10th year: $89,497
  • 15th year: $174,203
  • 20th year: $231,468
  • 30th year: $150,171
  • 40th year: $239,796
  • 50th year: $351,224

This means that after withdrawing $19,710 a year for each year from 55 years old to 66 years old. If she wants she can cancel her life insurance policy to cash out another $239,796 at the age of 76 or $351,224 at the age of 86.

And if she passes away at the age of 86th before she cancels her policy, her beneficiaries will receive $679,440 death benefit. The surrender value is more than half of the death benefit of the policy at that year.

Another example, we have a mock policy proposal for a man who started a guaranteed universal life insurance policy at the age of 45. He pays an annual premium of $1,386 for a $150,000 guaranteed coverage. On his account, he has the following surrender values:

  • 15th year: $10,397  
  • 20th year: $27,725  
  • 25th year: $34,656 

During the other years of the policy, the surrender value is listed as $0. That means he can surrender the policy on his 15th, 20th and 25th years and get that amount of cash back out of the policy.  

However, it’s worth noting that the death benefit was $150,000. So you’re still getting a fraction of the amount of money back in cash surrender value of life insurance when compared to what you were owed as a death benefit.  

Pros and Cons of Collecting the Cash Surrender Value of Life Insurance 

There are certain times to withdraw that amount of cash and other times where it might not make that much sense, which we’ll review below in a pro and con format.

Pros of Collecting the Cash Surrender Value of Life Insurance:

  • If you can no longer pay the premiums, it could make more sense to collect what cash value you can.
  • If you find a better life insurance policy that fits your needs, you can collect that cash value amount and begin investing in a new policy type.
  • Your life circumstances may have changed and you no longer need a death benefit, such as if your children are now financially independent, a divorce occurred, or a spouse died.  You can still collect the surrender value amount.
  • It might make sense in the case of an emergency and you need access to cash, such as if you are paying off a medical bill. If you cannot access cash through riders, this might be your only option.

Cons of Collecting the Cash Surrender Value of Life Insurance:

  • As mentioned above, the cash surrender value of life insurance often pales in comparison to the death benefit or even the cash value of the account. For instance, taking the number from above, you’d be getting $10,397 if you canceled on the 15th year of the policy. That’s around 7 percent of your total $150,000 death benefit.
  • In the case of an emergency, you may have other options, like pulling money out of the policy while still alive through riders. That’s why it’s important to look into riders before you set up a policy. 
  • It might be tempting to pull the cash now, but if your policy has cash value, you could risk wiping out years of savings through interest and causing your policy to lapse.

As you can see, there is no right or wrong answer to if you should collect cash surrender value of life insurance. It depends on your specific situation and financial goals.

Alternatives of Cancelling Your Permanent Life Insurance for Cash Surrender Value

If you need cash and consider cancelling your permanent life insurance policy for cash. Another alternative that you can consider is to sell your life insurance policy for cash.

When someone or a company is buying your permanent life insurance policy, they will take over the responsibility of paying premiums for you and will receive the death benefit when you pass away. As you can see in the example above, Susan can sell her policy at the age of 86 for $351,224 or selling it to someone at a higher price. That someone will hold on the policy and will receive a much larger amount of debt benefit when Susan passes away a few years later. This would be a really good investment.

Final Thoughts

Cash surrender value of life insurance is simply an amount of money you’ll get back from the insurance company if you cancel your policy during certain years. There is no cash surrender value in term life insurance policy. It’s often equal to the cash value account of the policy or a small portion of what your death benefit is if there is no cash value in the policy. However, it could make sense to collect in cases where you don’t need a life insurance policy anymore or you want to switch policies, as a couple of examples.

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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