What is Cash Surrender Value of Life Insurance?


The cash surrender value of life insurance is the amount of money the insurance company would reimburse a policyholder if the life insurance policy is surrendered before the insured dies. 

Gaining an understanding of what cash surrender value of life insurance is, and what the cash value can be used for while a policyholder is still living, helps resolve some of the misunderstandings about life insurance and the real cost of owning life insurance.

What is Cash Surrender Value of a Life Insurance Policy?

The cash surrender value of life insurance is unique to each type of policy.

  • With term life insurance, a cash surrender value may accumulate over time, but can only be accessed if the term policy is surrendered before a certain age. Not all term life insurance policies have a cash surrender value. But those which do, require the cash surrender value to be withdrawn before a certain age otherwise this value will be used to pay premiums until it has been completely expended.

  • With universal life insurance which includes traditional universal life, indexed universal life, and variable universal life, the cash surrender value of life insurance equals premiums paid minus:
    • the policy fee, 
    • the premium fee, 
    • the cost of insurance, 
    • the cash value accumulation fee, 
    • Plus any interest earned on the remaining balance.

Essentially the cash surrender value of a traditional, indexed or variable universal life policy equals the sum of any overpaid premiums plus any interest which has accrued on those overpayments. Still, due to the continual increase in the cost of insurance coverage in universal life insurance policies, the cash surrender value of the life insurance policy can be completely expended just to cover the costs. When this occurs, there is no longer any cash surrender value remaining in the life insurance policy.

In addition to the continually increasing cost of the insurance, the fees and charges associated with universal life policies, “make it very difficult for the buyer or even the insurance agent, to understand” these products according to the Council for Economic Justice.

The Council for Economic Justice has challenged the National Association of Insurance Commissioners to explain, in language that an average person who is thinking about purchasing a universal life product can understand, how universal life insurance products work. This explanation request includes, how the cash surrender value of life insurance is determined in a universal life insurance policy.

  • With whole life insurance, the cash surrender value of the policy is determined based on how much of the life insurance has been completely paid up. Much like a mortgage that builds equity for the homeowner with each mortgage payment made, whole life insurance develops equity with every premium paid for the policy. This equity is called the cash surrender value of a whole life policy or simply the guaranteed cash value.

    One of the guarantees in a whole life insurance contract is, when the contract is mature, the cash surrender value of the life insurance will equal the death benefit.  In addition to this guaranteed provision, which keeps the premium cost level for the entire life of the contract, some whole-life contracts allow the policyholder to earn annual dividends which are shared from the profits of the insurance company.

    Dividends are classified by the IRS as a “return of premium” and therefore tax-deferred if they are used to purchase more paid-up insurance. This paid-up insurance, which the dividends can purchase, increases the cash surrender value of the life insurance.

Another option with some whole life insurance policies is the ability to purchase a paid-up insurance rider. This paid-up insurance rider allows the policyholder to pay extra premiums to the insurance company which purchases additional paid-up insurance enhancing the cash surrender value of a life insurance policy much faster than would routinely occur. This rider is similar to making extra payments on a mortgage. It pays the mortgage off faster and builds equity more quickly. Likewise, a paid-up insurance rider accelerates the time when a policy can be completely paid up and increases the cash surrender value of the policy with each additional payment made for the paid-up rider. 

Also, see my blog on the Fungibility of Permanent Life Insurance.

The Difference Between Cash Value and Surrender Value

Cash value and surrender value can be used interchangeably as they are synonymous terms when evaluating and discussing whole life insurance. Thus, the surrender value equals the cash value when a policyholder surrenders their whole life policy. 

When it comes to universal life insurance, however, the cash surrender value of a life insurance policy may not be equivalent to the accumulated cash value or even to the total policy cash value. This is due to the surrender fees and possibly other accumulated cash value fees that universal life insurance policies may contain. See my blog on Inherent Dangers Hidden in Indexed Universal Life Insurance Contracts.

Which Types of Insurance Offer Cash Surrender Values?

Most types of life insurance can offer cash surrender values, but not all life insurance companies make cash surrender values available in the policies they sell. Furthermore, agents who design the policies, don’t always include the options to maximize cash surrender value when they design a policy for a potential policyholder. 

It’s often up to the customer to understand what options are available and make sure that the cash surrender value of a life insurance policy is maximized when they are shopping for life insurance. A whole-life policy with a design for maximum cash value can develop more guaranteed cash surrender value than what the premiums for the policy have cost within the first 10-12 years for most people under the age of 65. Thus, the cash surrender value of a good whole life insurance policy can quickly offset the cost of policy premiums.

How to Calculate the Cash Surrender Value of Life Insurance?

The calculation to determine the cash surrender value of a life insurance policy is done by the insurance company and can be requested by any policyholder directly or through their agent. It will be illustrated or quoted by the insurance company as part of your policy service. Projections of the cash surrender value of a new life insurance policy are required to be illustrated and signed by the agent and the policyholder at the time of application or at the time of delivery. 

Why Should You Surrender Your Life Insurance Policy?

Surrendering a life insurance policy may be considered if the policy is no longer serving or meeting the needs for which it was initially purchased. Nearly 99% of all term policies are surrendered before ever paying a death benefit. 

The cost of term insurance simply becomes too expensive to keep a term policy once the level term period has expired. This is often the case with universal life insurance as well. The cost of insurance in all universal policies increases annually as long as the insured lives. Surrendering a universal life insurance policy, however, can trigger a surrender charge and potentially a tax liability. To avoid both of these, it is important to evaluate and understand how to avoid these charges before surrendering a universal life insurance policy. 

Surrendering a whole life policy can also trigger a tax liability if the total premiums paid (aka “the cost basis”) are less than the cash surrender value of the life insurance policy.

Ways You May Be Able To Keep Your Policy

If a term policy is no longer necessary or required to protect the insured’s income or cover debt or liabilities, surrendering it may be a good option. The cost of term insurance has decreased over the past couple of decades and surrendering one term policy to be able to afford better coverage at a lower cost is always a good option.  But one should never surrender any life insurance policy without first knowing they have replacement life insurance coverage. 

Keeping a universal life policy until the surrender fees are no longer applicable is a way to potentially keep from losing money when surrendering this type of life insurance policy. Another way to “surrender” a universal life policy is to complete a 1035 exchange to a whole life policy which usually provides better-guaranteed values.

A 1035 exchange transfers the cash surrender value of one life insurance policy to another life insurance policy or to an annuity. Completing a 1035 exchange can keep the cash surrender value of the policy from having to be declared as income, which could trigger a tax liability while allowing the policyholder to continue to benefit from the cost basis which has been paid towards the original policy.

Surrendering a whole life policy that has created more cash surrender value than the cost basis, will trigger a tax liability on any of the cash surrender values which exceeds the cost basis. One way to keep a whole life policy without having to pay further premiums, and still benefiting from continued cash value growth and potential dividends, is to reduce the death benefit. This is called a reduce paid-up policy (RPU). An RPU’ed policy will no longer require premiums to be paid but may continue to earn dividends (sometimes higher dividends than a policy that has not been RPU’d), as well as some continued guaranteed growth of the cash surrender value.


The cash surrender value of a life insurance policy – what it is, what can be done with it, how soon it develops, and what happens if the policy is surrendered, should be understood by anybody who owns or who is considering owning life insurance. 

A well-designed dividend-paying whole life insurance policy is the only type of life insurance that can generate a guaranteed cash surrender value that will exceed the long-term cost basis, while also potentially paying dividends. 

Term and universal products are limited to either a refund of premiums paid or dependent on speculation in potential market returns for long-term cash value growth above premiums paid. Universal life insurance policies are also limited by fees, charges, and the escalating cost of insurance which deplete the cash surrender value over time.

At McFie Insurance, we specialize in designing and helping people who want whole life insurance with high cash value to premiums paid. To see how a good policy is designed for high cash value and sustainable living benefits, call us at 702-660-7000.


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