Are you wondering about Cash Surrender Value Life Insurance? Life insurance is often viewed as a way to provide financial protection for your loved ones after you pass away. However, if you have a permanent life insurance policy, such as whole life or universal life insurance, it may include a feature that can benefit you. At the same time, you are still alive: the cash surrender value.
In this guide, we explain it in simple terms and demonstrate how this lesser-known feature can provide you with real financial flexibility when you need it most.
What Is Cash Surrender Value Life Insurance?
When you purchase a permanent life insurance policy, a portion of your premium covers the cost of insurance. At the same time, the remaining amount contributes to a savings component known as the cash value.
Over time, the cash value accumulates within your policy. If you decide to cancel your policy, the insurer will return a portion of this cash value to you, known as the cash surrender value.
This feature is unique to permanent life insurance policies. Term life insurance does not have any cash value, as it only provides coverage for a specific number of years and then expires.
How Does Cash Value Build Over Time?
In the early years of your policy, most of your premium goes toward covering insurance costs and fees. Another portion of your premium is allocated towards a savings/ investment account within your policy. Over the years, your cash value begins to grow, initially at a slow pace, but accelerating as time passes.
With whole life insurance, your cash value grows at a guaranteed rate and may be increased by dividends if your policy participates in such a program. For universal life insurance, the growth rate varies depending on the policy’s structure. Some policies are linked to fixed interest rates, while others are tied to market performance.
The longer you maintain the policy and continue making payments, the more your cash value accumulates. This is why permanent life insurance is often viewed as a long-term financial tool, rather than just a means of protection.
If your financial situation changes or you urgently need money, you might consider cashing out your life insurance policy. This means ending the policy before it matures.
Instead of the full payout you’d get at maturity, you’d receive a smaller amount called the surrender value, the portion of cash your policy has built up over time. Cashing out usually isn’t the best option, but it might make sense if you’re struggling financially or have a better place to invest your money.
What Happens When You Surrender the Policy?
If you choose to cancel or “surrender” your permanent life insurance policy, your insurer calculates the cash surrender value and pays it out to you. The payout amount is determined by subtracting any surrender charges, outstanding policy loans, or administrative fees from the policy’s total cash value. Typically, surrender charges are higher during the policy’s early years and gradually decrease over time.
Most life insurance experts would agree that you should avoid surrendering a permanent policy if you can, as the payout you receive will be considered taxable income.
When you surrender your policy, your life insurance coverage ends permanently. This means that your beneficiaries will no longer receive a death benefit, and your policy will be considered officially closed. This is a significant decision, so it’s essential to carefully consider your current needs and consult with a qualified advisor before proceeding.
Why Would You Borrow Against or Access the Cash Value in Your Life Insurance?
There are various reasons someone might choose to access the cash surrender value of their policy. You may no longer need the coverage. Perhaps your children are financially independent, or you’ve paid off your mortgage. You may also need money for unexpected emergencies, health issues, or significant expenses such as tuition or home repairs. Some utilize their cash surrender value to supplement retirement income or fund travel in their later years.
Whatever your reason, it’s reassuring to know that your policy can benefit you while you’re still alive, not just after you pass away.
What’s the Difference Between Cash Surrender Value and a Policy Loan?
This is a common question that many people ask. When you take a policy loan, you’re borrowing against the cash value of your policy without canceling the coverage. While the loan accrues interest, if you don’t repay it, the amount will be deducted from your death benefit.
In contrast, when you surrender your policy, you relinquish all coverage in exchange for a lump sum payout. There is no loan to repay, but this also means your death benefit is reduced.
The key difference is that a loan keeps your policy active, while a surrender ends your coverage.
Are There Tax Implications?
There can be tax implications when you surrender your policy. In Canada, if the amount you receive from surrendering your policy is greater than what you paid into it (referred to as your policy’s adjusted cost basis), that excess amount is considered taxable income.
That’s why it’s crucial to consult a financial advisor before making this decision. They can help you determine how much of your payout may be subject to taxes and assist you in exploring alternative options, such as a partial withdrawal or a loan, if you wish to avoid incurring a tax bill.
How Do You Find Out Your Policy’s Cash Surrender Value?
If you already have a permanent life insurance policy, your insurance company or advisor can provide what’s called an in-force illustration. This document shows:
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Your current cash value
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The surrender value after deductions
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The death benefit if you keep the policy active
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Any outstanding loans or fees
This is a great starting point if you’re evaluating your policy’s performance or thinking about cashing it out.
Using Cash Value Strategically as Part of Your Financial Plan
One of the lesser-known benefits of cash surrender value life insurance is its ability to support your overall financial strategy. This is proactive financial planning, not reactive.
Some policyholders utilize the accumulated cash value from their permanent life insurance policies to bridge financial gaps during retirement when other income sources may be insufficient. Others might use it to pay for long-term care or private health expenses later in life, especially for costs not covered by traditional insurance plans.
The cash value within a permanent life insurance policy grows on a tax-deferred basis. This makes it a potentially more efficient savings vehicle compared to a traditional taxable account. Please note that this is not a substitute for registered accounts, such as RRSPs or TFSAs. It serves as an option for those who have maximized their registered savings and are looking to build long-term value with added flexibility. A policy with a cash surrender value can significantly contribute to wealth preservation.
What makes this option particularly valuable is the flexibility it provides. You don’t have to use the cash value, but it’s available if you need it. In a financial landscape where many products come with restrictions, penalties, or confusing terms, this built-in flexibility is certainly something to appreciate.
Is It a Good Idea to Surrender Your Life Insurance?
The decision depends entirely on your goals. If you no longer need life insurance and your policy has accumulated significant cash value, surrendering it can be a smart way to access cash for other needs. However, it’s essential to ensure you are comfortable giving up the protection that your policy provides.
If you still need life insurance but require access to funds, consider taking a policy loan or making a partial withdrawal. These options allow you to access some of your policy’s value while keeping the coverage in place.
Whatever you decide, take your time. It’s important to consult with a licensed advisor who can help you evaluate the pros and cons.
Final Thoughts: Protection Now, Value Later
Whether you’re just starting to explore permanent life insurance or reviewing a policy you’ve had for years, understanding the cash surrender value can be very empowering.
Although it may sound technical, once you understand how it works, you’ll realize its value. Life doesn’t always go as planned, but having a policy with cash value offers the flexibility to adapt to changes without losing the investment you’ve made.
If you appreciate having a safety net in your financial decisions, cash surrender value life insurance could be one of the most beneficial tools in your financial toolkit.
