The Difference Between Surrender Value And Cash Value of A Permanent Life Insurance Policy

/ Life Insurance / Aug 15, 2020

If you closely go through your permanent life insurance policy, you will come across terms that sound similar, but mean different.

The list can include terms like cash value, face value, cash surrender value, account value, surrender cost, etc. The differences between these terms can be small but when pulling money out of your policy, they can make a huge difference.

The cash and the surrender value of your permanent life insurance policy are not the same. Let us see where the differences lie and how they matter when you cancel your policy early.

Cash Value

The cash value of a permanent life insurance policy is equal to the total sum of money held in your account. Your insurance allocates a certain sum of money you pay through premiums toward investments and then allocates the credits to your policy based on the performance of such investments.

Only permanent life insurance policies like Whole Life Insurance, Universal Life Insurance, etc. build cash value over time. Term life insurance policies do not build any cash value.

Surrender Value

Surrender value refers to the actual sum of money received by the policyholder in case s/he tries to access the cash value of his/her permanent policy.

There is often a penalty associated with early cash withdrawal (surrendering) from the policy.

The difference between surrender value and cash value often lies in the charges associated with early termination. Since the insurance company does not want you to stop your premium payments or opt for an early cash withdrawal from your policy, it builds several fees to discourage you from cancelling your policy.

Your surrender value will be affected by the surrender fees, resulting in a substantial reduction of your final amount. These values and costs can fluctuate over the life of your policy. After a certain period of time, there will be no surrender costs in your policy. Then, your surrender and cash value will essentially be the same.

Note: Cash surrender fees typically cease to exist after 10 to 15 years for a universal and whole life policy. Consult our experienced financial advisors to know about possible surrender fees in detail when opting for permanent life insurance in Toronto, Mississauga, Canada.  

Difference between Cash and Surrender value in terms of an example

Say, you have opted for a Whole Life Insurance plan with a certain death benefit of $500,000.

You have made consistent on-time payments for 10 years at a stretch. After 10 years, you have noticed that you have $40,000 as cash value in your policy. You wanted to opt for early withdrawal and realized that the policy has a surrender charge of 40% after 10 years.

This fee means that in case you try to opt for an early withdrawal of cash from your policy after 10 years, the insurance company would assess a 30% charge, which is equivalent to $16,000, on your accumulated cash value at that point in time.

This will leave you with a surrender value of $24,000.

Final Word

Always consult with your financial advisor before opting for an early withdrawal of cash from your permanent life insurance policy. Your advisor can help you assess your financial situation, providing you with the best advice to minimize losses and maximize return as much as possible.

Know more about permanent cash value life insurance plans and the ways they can benefit you and your family in safeguarding your financial future with a tax-shelter. Get in touch with one of our financial advisors now!