When it comes to permanent life policies, policyholders should be familiar with two key concepts: the cash value and the cash surrender value of life insurance.
Cash value applies to permanent life insurance — not term life insurance. After fees and expenses, it is the amount of money that the policyholder accumulates within the policy over time. On the other hand, the surrender value is the amount of money that the policyholder will receive if they cancel their policy early.
Here's what you need to know about them both, as well as any potential fees you might incur.
What Is the Cash Value of a Life Insurance Policy?
When customers make payments, a part of it goes toward the cash value of the policy. The insurance company usually invests this money with the goal of generating a positive return. Policyholders hopefully see growth in the cash value over time.
The cash value of a life insurance policy grows tax-deferred, which means that the policyholder does not have to pay taxes on the money until they withdraw it. Their beneficiaries will later receive the policy's death benefit, which is usually equal to the face value of the policy. Cash value differs from the death benefit, because policyholders can withdraw cash value while they are still living.
Policyholders can also typically borrow against the cash value, which involves borrowing money from the insurance company and paying back the loan with interest. The interest rates for life insurance loans are usually lower than the rates for credit cards or personal loans.
What Is the Cash Surrender Value of Life Insurance?
The cash surrender value of a permanent life insurance policy is the amount of money the policyholder will receive if they cancel their policy early. Depending on how long the policyholder has had the life insurance policy, the surrender value is usually less than the cash value because of the fees associated with canceling. Most life insurance policies include a surrender fee for canceling early, which will reduce the surrender value, as well as an administrative fee that the insurance company charges for maintaining your policy.
Why Would Someone Cancel Their Life Insurance Policy?
There are a few situations in which someone might cancel their life insurance policy:
They no longer need coverage.
Their premiums have become too expensive.
They found a better deal on another policy.
They want to use the money for another purpose.
They decide to switch to a term life insurance policy.
When Do Surrender Fees Apply to a Life Insurance Policy?
Surrender fees typically apply to newer life insurance policies. Many insurers waive surrender fees once a policy reaches 10–15 years old. Read the fine print on your life insurance policy before you withdraw the cash value or cancel it altogether. Sometimes, you can get your cash surrender value without canceling the policy altogether; it depends on what type of policy you have and your insurer's conditions and fees.
Do your research before borrowing or withdrawing money from a permanent life insurance policy. If you ever think of canceling your life insurance policy, always consider how the associated surrender fees will affect the surrender value.