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Calculating Cash Surrender Value Of Life Insurance Accurately and Tax Implications: All Your Burning Questions Answered!

Feeling strapped for cash isn’t a good feeling, especially if you’re already retired and don’t have an income. If you have a cash value life insurance policy, you may surrender the cash value portion and use it to supplement your income.

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Common uses for a cash surrender value of life insurance include paying bills, covering medical expenses, or paying for unexpected emergencies. Having cash surrender life insurance is often the saving grace in an experience that otherwise might cause financial distress.

But how does it work? What is the minimum guaranteed surrender value?

Learn all this and more in our guide below.

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Is this a good choice?

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Before surrendering your cash value life insurance, ask yourself, ‘is this the right choice?’ Like every financial decision, there are pros and cons. We’ll help you understand what to consider before making this decision.

What Is A Cash Surrender Value?

Your cash surrender value is the money the insurance company will pay you if you terminate the policy or cash in a portion of your cash value. Each policy has requirements when you can touch the cash value and when you can’t – but if you terminate the policy (end your life insurance), you’ll receive the cash value in hand but leave your loved ones with no life insurance when you die.

The surrender value of life insurance is like a savings vehicle. It’s the portion of the premiums you paid that the insurance company invested for you. Some of your premiums covered the death benefit and the other part was invested, almost like an automated savings vehicle.

It’s most common with whole life insurance policies, but a few others have it too.

How Long Does It Take to Raise Cash Value?

Your life insurance policy won’t have a cash surrender value immediately – it takes time. Your money needs time to build up, accumulate interest, compound, and then can be withdrawn.

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On average, it takes two years to get a significant amount of money in your cash value, but not enough for you to live on. The earlier you purchase a cash value life insurance, the more time it has to grow and potentially help you supplement your retirement income.

What Happens to your Life Insurance if you use the Cash Surrender Value?

The name says it all. If you surrender your cash value, you also surrender the life insurance policy in most cases.

The company pays you the net cash value when you surrender your life insurance policy. At the start of a policy, this won’t be the full cash value since you must pay fees and a surrender charge.

But, if you’ve had your policy for 15 years or longer, your surrender value is typically close to, if not equal, the cash value.

What if you take a portion of the cash surrender value?

This is a different situation. If you take only some of the cash value, you keep your life insurance in place, but the insurance company reduces your death benefit in an amount equal to the amount you withdrew.

Here are two examples.

John has a whole life insurance policy with a cash value of $10,000. John needs the entire $10,000 for an unexpected hospital stay that he can’t pay. John surrenders his cash value life insurance, canceling the policy and taking the cash value. Since John had the policy for over 15 years, he received most of the $10,000.

Jan has a whole life insurance policy with a cash value of $20,000. She needs to supplement her retirement income for the next year until her Social Security benefits start, so she surrenders some of your cash value but not all of it. She takes $5,000. Jan keeps her life insurance policy in place, but her death benefit is reduced by $5,000.

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How to Calculate the Cash Surrender Value (CSV) of Life Insurance?

The cash surrender value of life insurance depends on many variables.

  1. How much cash value do you have?
  2. How long have you had the policy?
  3. How long is your surrender term?
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The less time you’ve had your policy, the lower the percentage of your cash value you can surrender and the higher the fees. The surrender charges are usually pretty high during the first few years of the policy and then taper down the longer you have it.

You may find that your surrender value is 0% during the first five years of your policy, but at 10 years, you can surrender as much as 90%.

Read your policy’s fine print to determine the surrender value, penalties, and charges before surrendering your policy, or talk to your insurance agent to make sure you understand.

You may have other options, too – instead of surrendering the policy, you may be able to withdraw funds or take a loan.


To calculate your cash surrender value, take the total cash value (premiums you’ve paid minus the death benefit premiums) and subtract any surrender fees the life insurance company charges (read the fine print on your policy).

Essentially, the life insurance cash surrender value will be less than the face value of the policy or the death benefit. By taking the CSV, you will terminate the policy at that point. It is possible, however, that you may earn more income from the earnings that the premiums are providing, which may entitle you to dividends.

If you want a ballpark figure, just take your regular monthly insurance payment and time it by the number of months that you have been paying. That should give you a minimum amount; from that, you can consider cashing out your policy.

Is Cash Surrender Value On Life Insurance Taxable?

Will you owe taxes on the cash surrender value of your life insurance?

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It depends on how much you withdraw. If you withdraw only up to the amount you’ve paid in premiums thus far, you won’t pay taxes. But, if you withdraw any dividends or interest earned, you’ll owe interest on that amount.

But there are alternatives.

If you have a large amount of dividends that will trigger a significant tax liability, consider using the cash value in other ways.

For example,

If you use the cash value as collateral on a loan, you get the money you need from the loan but don’t incur a tax liability. You’ll have a loan payment, but it may be a good alternative if it’s less than the tax liability.

Difference between Cash Value and Surrender Value of Life Insurance

Don’t confuse your policy’s cash value and surrender value – they are two different things. The cash value is the money you’ve built up in the policy. It combines the money you contributed and the dividends it earned.

The surrender value is the net cash value you can withdraw or surrender if you no longer want the policy. The surrender value is, after all, surrender fees and other charges taken out of your cash value. The earlier in your policy’s term that you withdraw the funds, the higher the surrender values and fees will be (the less cash you’ll receive).

Alternatives to Surrendering Your Cash Value

Sometimes surrendering your cash value isn’t the wisest financial decision. First, you’ll cancel your life insurance policy, which can be detrimental if you don’t have another policy in its place.

Second, you may incur such high tax liabilities that it’s not worth taking the cash value. Before surrendering your life insurance policy, consider these options:

  • Use your cash value policy as collateral – Many banks allow you to use a cash value policy as collateral on a loan. This way, you get the necessary cash without canceling your policy or triggering a tax liability.
  • Withdraw funds – You can withdraw some of your funds, leaving the dividends intact. This keeps your life insurance policy in place and avoids excessive taxation.
  • Borrow from your cash value – Some life insurance policies allow you to take a loan against the cash value. You’ll have to pay the money back eventually, but you’re paying yourself rather than a bank, and you keep your life insurance policy in place.

There are certainly several implications for tapping the policy’s cash surrender value. You will want to take these suggestions into account before taking any action.

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What Happens After Death?

This is important.

If you have a cash value life insurance policy, you’ll want to use it before you die or the insurance company keeps it. In other words, when you die, the insurance company absorbs your cash value and pays your beneficiaries the death benefit.

The money you invested alongside the premiums for your death benefit goes to the insurance company rather than you or your beneficiaries.

Instead of letting the money sit, put it to good use. Whether you withdraw some of it, take a loan, or use the funds to pay your insurance premiums instead of you paying them, use the cash value to your advantage before you die.

Remember that…

A cash value is a good emergency account for younger people, but older people should use caution. Building up a cash value you can’t use is like throwing money out the window. If you don’t need the cash, ask your insurance company to increase your death benefit and use the funds to cover the premiums.


What happens when a policy is surrendered for cash value?

If you surrender your life insurance policy, you essentially cancel it. While you get cash in hand in exchange for the surrender, you leave your loved ones with no coverage if this was your only life insurance policy.

Before you surrender your cash value, think about the long-term effects. If you have money in the life insurance that you haven’t used, talk to your life insurance agent about your options, including using the money to pay your life insurance premiums so you no longer have to pay the premiums yourself.

Does term life insurance have a cash surrender value?

No, term life insurance doesn’t have a cash surrender value. Only whole and universal life have cash surrender values.

Can I withdraw the cash surrender value?

When you build up a high enough cash value, you may be able to withdraw some of it and keep your policy in place. The amount you withdraw will directly reduce your life insurance benefit, but if you have a high death benefit that you no longer need to leave for your loved ones, you can take the cash and enjoy it.

What happens when a policy is surrendered for its cash value?

If you surrender your total net cash value, you surrender the life insurance policy. You’ll have no more death benefits with that policy. If this is your only life insurance policy, it’s not good practice to surrender the policy; instead, use one of your alternatives.

Do you get money back if you cancel your whole life insurance?

You don’t get money back from the premiums you paid on your whole life insurance policy that covered the death benefit. You’ll receive the net cash value of your cash surrender value on a whole life policy, though. The longer you’ve had the policy, the more cash you’ll receive.

The Bottom Line

Before taking your cash surrender value, talk to your insurance agent. Make sure it’s the right choice after evaluating all alternatives.

You invested in a cash value life insurance policy, and you deserve to use the cash (or the insurance company gets it), but use it wisely and not at the expense of a death benefit you need to protect your loved ones.

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