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?
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!
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:
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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:
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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Let’s put some numbers in here to help this make sense.
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
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:
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:
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:Get a Free Quote Now