Cash Value vs. Surrender Value: Which Is Better for You

Some professionals will make cash value vs. surrender value sound like a difficult concept, but our article breaks it into an easy-to-read guide.

Cash value and surrender value are common among annuities and permanent life insurance policies. We’ll focus on the difference between these two life insurance terms and how both values affect your life insurance policy.

If you have permanent life insurance, you’ll come to know the difference between cash value vs. cash surrender value. Although these terms sound the same, these two permanent life insurance factors are quite different:

• Cash value is the life insurance savings account associated with most whole life policies
• Surrender value is the value of the policy minus the insurance company’s cancellation fees

Cash value life insurance builds a savings account by investing a portion of your monthly premium.  As you pay your monthly rates, a portion of your monthly payments goes toward the cash-value account, while the other part applies to your policy. Some accounts allow you to make investments, such as bond portfolios and other types of investments.

While cash value refers to the life insurance savings account associated with permanent policies, the surrender value is the amount of the policy itself minus cancellation fees. If you decide to cancel your whole life insurance, you won’t receive a refund for the whole value — you receive the policy’s surrender value.

According to the Internal Revenue Service (IRS), any money you receive from the surrender value of life insurance is taxable income.

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How Cash Value Works in Life Insurance

Cash value is the sum of money you’ve built up while paying for life coverage. You cannot cash out term life insurance — only permanent policies have an investment component.

Suppose you buy a permanent life insurance policy, such as a whole life insurance policy, and you have a death benefit of $250,000. If you make $1,000 annual premium payments for 15 years, you will have a $15,000 cash value.

You can withdraw from the accumulated premiums‘ value, but your provider may charge a fee when you want to access funds. Each company that provides a permanent policy has a different percentage, so shop around until you can find a surrender charge that works for you.

Early withdrawals come with a penalty. However, penalties won’t affect your credit, and you aren’t required to pay back loans against life insurance. Loans are subtracted from the policy’s death benefit amount, so borrow wisely 

An Example of Surrender Value in Life Insurance

If you decide to surrender your life insurance policy, research the surrender fee your insurance company charges. For example, if you see that a 30 percent surrender fee will affect your cash value when cancel the policy, then the surrender charge will deduct $4,500 from your $15,000 cash value. Therefore, your surrender value is $10,500.

If you have term life insurance, there is no surrender value, and you will not receive any refund for canceling a policy. Read more about how to cancel life insurance.

Cash Value vs. Surrender Value: Permanent and Term Life Insurance

Only whole life insurance has a cash and surrender value. Let’s examine more differences by looking at term vs. whole life insurance rates.

Some permanent insurance policies have complex concepts, such as universal life insurance and variable universal life insurance. Term life policy is much simpler and cheaper, but this type of life policy doesn’t have the savings benefit of a permanent policy.

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Case Studies: Cash Value vs. Surrender Value

Case Study 1: John’s Whole Life Insurance Policy

John purchased a whole life insurance policy with a death benefit of $250,000. Over 15 years, he made annual premium payments of $1,000. At the end of this period, the cash value of his policy reached $15,000.

John had the option to withdraw from this accumulated cash value; however, his insurance provider would charge a fee for accessing the funds.

John decided to cancel his policy and discovered that there was a 30 percent surrender fee. As a result, $4,500 was deducted from his $15,000 cash value, leaving him with a surrender value of $10,500.

Case Study 2: Sarah’s Term Life Insurance Policy

Sarah had a term life insurance policy, which does not accumulate cash value. She decided to cancel her policy, but since there was no surrender value associated with term life insurance, she did not receive any refund for canceling the policy.

Case Study 3: Michael’s Universal Life Insurance Policy

Michael opted for a universal life insurance policy, which offered both cash value and surrender value. Over time, he accumulated a substantial cash value within his policy. He utilized the cash value as an investment opportunity, allowing him to grow his savings.

Michael valued the flexibility and potential growth of the cash value component in his policy, even though it came with higher premiums compared to term life insurance.

Case Study 4: Emily’s Comparison of Permanent and Term Life Insurance

Emily compared cash value and surrender value in both permanent and term life insurance policies. She discovered that only permanent policies, such as whole life insurance, had cash and surrender values.

On the other hand, term life insurance did not offer these features. Emily found that permanent policies provided investment opportunities and savings benefits, while term policies were simpler and more affordable.

Cash Value vs. Surrender Value: What is the bottom line?

A cash value can be useful, especially for policy owners who have had their life insurance policy. To access more saving and investment opportunities with cash value life insurance, buy permanent policies like universal or variable whole life insurance. These policies are more expensive but come with more investment opportunities.

If you need cheap life insurance plans, you may want to explore term life insurance quotes. Use our life insurance comparison tool above to compare different policies and cash value options from life insurance companies in your area.

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