When shopping for life insurance, there are some common terms you’ll likely encounter depending on the type of policies you’re exploring. For example, if you’re interested in either permanent life insurance or whole life insurance, you’ll probably see the terms “cash value” and “surrender value.” Understanding the difference between the two can give you greater insight into the value of your policy. In this article, we’ll walk you through the difference between the cash value and surrender value of a life insurance policy.
Cash Value
The cash value of a life insurance policy, also known as the policy value, is the interest-earning cash component of a permanent life insurance policy, such as universal or whole life. The policyholder may be able to access the cash value through a policy loan (which will accrue interest) or by surrendering the policy.
The cash value component is separate from the death benefit and is one of the main benefits that come with a permanent life insurance policy. Not only can you borrow from the cash value, but it also accrues tax-deferred interest—giving you an extra financial cushion along with lifelong coverage.
Surrender Value
The surrender value of a life insurance policy is the actual sum of money you’d receive if you tried to access the cash value of your policy. The surrender fee, also known as the surrender charge, is the charge collected upon the cancellation of a life insurance policy. The surrender fee reduces the value of your surrender value, but is only applicable if a cash value exists. There is no surrender fee if there is no existing cash value. The surrender value and surrender fee can fluctuate over the life of the policy.
Typically, you can avoid the surrender fee if you notify your insurance carrier of your cancellation in advance. After a certain period of time, which is designated when you purchase your policy, the surrender charges will no longer be in effect. The process in which you can access your cash surrender value depends on your policy and carrier, but many require you to cancel your policy before you are able to access the cash value.
Difference Between Surrender Value and Cash Value
The cash value of a life insurance policy refers to its overall value of the savings portion of your policy that accumulates over time. The surrender value is the dollar amount you actually receive if you choose to terminate your policy, which is typically the cash value minus any surrender fees. Surrender fees will typically depend on the point at which you terminate your policy; for example, the percentage will typically be highest if you terminate within the first year of your policy, and will go down for each year you hold the policy.
How to Calculate Cash Value of Life Insurance
If you’re planning to make a withdrawal from your life insurance policy, it’s helpful to understand how to calculate the cash value. As you pay your premiums for your policy over time, a portion of that amount is deferred as savings, which make up the cash value. You can estimate the actual cash value of your policy by calculating the total amount of payments you have made and subtracting any surrender fees your carrier has implemented.
Explore Whole Life Insurance with SelectQuote
If you’re interested in a life insurance policy with a cash value, whole life insurance is a good option for lifelong coverage. Whether you think you’d be interested in whole life insurance or are looking to consider all your options, SelectQuote can help. We quickly and easily search highly trusted carriers, comparing plans and quotes to find you the right policy for your needs and budget.
