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How to Calculate Cash Surrender Value of Life Insurance
If you know how to calculate cash surrender value of life insurance, you can make an educated decision on what you stand to gain – or lose – by cancelling your current permanent policy.
First things first – when we talk about “surrendering” a policy, we’re only talking about permanent policies such as whole life or universal life. Only permanent policies build cash value, which is what creates the policy’s surrender value.
Ready to learn more? Here’s what we’ll cover:
What Does It Mean to “Surrender” a Policy?
5 Key Facts about Surrender Value
How to Calculate Cash Surrender Value of Life Insurance
Examples of How to Calculate Cash Surrender Value
Should You Surrender Your Policy?
What Does It Mean to “Surrender” a Policy?
If you no longer need or want your policy, you can surrender it. In insurance-speak, “surrender” means cancelling the policy with your insurer and requesting what’s called the “surrender value” as a cash payout.
To get your policy’s surrender value, you have to make the cancellation through your insurance provider. In other words, you can’t just stop making payments and expect the insurer to send you a check. If you simply stop making payments, your policy will lapse. This means you’re no longer covered by the policy and you won’t be able to get any surrender value as compensation. If you’re taking the time to research how to calculate cash surrender value of life insurance, be sure you follow your insurer’s instructions to the letter!
5 Key Facts about Surrender Value
Every provider has different terms for surrendering a policy. Check your policy documents – they were provided when you bought your policy. If you can’t find them, contact your insurer for details. If you bought your policy through us, give us a call and we can get that information for you!
Here are a few other things to consider:
- You probably won’t be able to surrender a policy if you just purchased it. Most insurers have an initial surrender period that you have to wait out before your policy is eligible for surrender value. It might be a couple years, or it might be a decade – it all depends on your specific insurer and policy type. Don’t waste time figuring out how to calculate cash surrender value of life insurance if your policy isn’t eligible yet.
- The longer you’ve had your policy, the greater the surrender value. Your policy’s cash value is what creates the surrender value. Cash value grows over time, so in the early years of a policy, there won’t have been much growth yet.
- The longer you’ve had your policy, the less it will cost you in surrender fees. Insurers often charge surrender fees that lessen as time passes. There may be an initial blackout period (the surrender period mentioned above), and tiered fees that decrease the longer you’ve had your policy. These fees have quite a bit of range – from several percent to as high as 35%. Those policy documents will spell out any particular surrender fees or penalties you need to be aware of.
- If you have outstanding cash value loans or withdrawals, those will be subtracted from your surrender value. If you were to keep the policy, those loans or withdrawals would simply be subtracted from the death benefit. But when you cancel the policy, those loans or withdrawals will be subtracted from your total remaining cash value instead.
- You may owe income tax on part of your surrender value payout. Because cash value grows with interest over time, it’s possible that you’ve accumulated more than you’ve paid into the policy. The longer you’ve had your policy (10+ years), the more likely this is to happen. If your surrender value ends up being greater than the amount you’ve paid into the policy, you’ll probably owe income tax on that overage. Click here to read more about life insurance and income tax.
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How to Calculate Cash Surrender Value of Life Insurance
As you probably know, a portion of every payment you make goes into your policy’s cash value account, which accrues interest and grows over time.
This accumulated cash value - minus any cancellation fees – is your policy’s surrender value.
So when we talk about how to calculate cash surrender value of life insurance, we’re really talking about identifying two specific figures:
- Your accumulated cash value, and
- Any surrender fees or penalties your insurer will charge
Here’s the formula you can plug those numbers into to calculate your policy’s surrender value:
Cash value accumulated – surrender fee and/or penalty = Surrender value
If you’ve had the policy for 10+ years, you may want to use this second equation to figure out if you’ll owe any tax on the payment you receive. Consult your accountant/CPA for further guidance on how to handle this.
Surrender value – total amount you’ve paid in premiums = Taxable income
Note: if this is a positive number, you owe tax; if this is a negative number, you do not owe income tax.
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Examples of How to Calculate Cash Surrender Value of Life Insurance
Let’s put some numbers in here to help this make sense.
Example #1
Say you’ve had your policy for 10 years with an accumulated cash value of $5,000. If your insurer charges a fee of 15%, here’s how the calculation works out:
$5,000 x 15% = $750 surrender fee
$5,000 - $750 = $4,250 surrender value for you
Example #2
Now, let’s look at a different example where more cash value has accrued. In this example, let’s say you’ve had the policy for 20 years, paying $250 per month, with an accumulated cash value of $20,000. If your insurer charges a fee of 15%, here’s how the calculation works out:
Should You Surrender Your Policy?
That’s a question only you can answer.
If you’ve been researching how to calculate cash surrender value of life insurance because you need a quick source of cash, we’d advise against it.
Why? Because, if you pass away after you cancel coverage, your loved ones won’t get a cash payout. That puts them at risk of financial instability if something were to happen to you. You recognized the need to protect them when you bought the policy. Unless that need has vanished, your loved ones still need that protection.
Here are a few alternatives to keep them protected:
- Do you have enough cash value to pull out and use for payments? If so, this could be a solution that lightens your financial load and buys you time while you further evaluate your needs.
- Can you take out a policy loan and use the money for payments? Almost all insurers will loan you money using the policy as collateral, charging a small amount of interest in return. If the loan is still outstanding when you pass away, your insurer will subtract that amount from the death benefit before paying it to your loved ones. This lets you keep your coverage and reduces the strain on your pocketbook.
- Can you purchase a new policy that better meets your needs before surrendering the one you have? If a less expensive term life policy would fit your budget better, get that coverage in place before you surrender your current policy. We can help!
Still have questions? We’re happy to help. Give us a call at 800-521-7873 today!
If getting a new policy is an option you’d like to pursue, you can get a quote here on our website:
