The term surrender value refers to the amount a life insurance contract is worth after any charges and fees from the insurance company if the contract is fully surrendered (terminated early). This is not necessarily the same figure as the cash value, which does not include surrender fees. To properly calculate the surrender value one must deduct all surrender charges from the current cash value.

Surrender Charges Reduce Surrender Value

As mentioned above the difference between the cash value and the surrender value is typically the surrender charges, which can be a fairly large percentage of the value in the early policy years. Surrender charges drop over time and eventually become zero. When surrender charges are zero the cash value and surrender value will be exactly the same. Surrender charges may start as high as 10 or even 15 percent of the cash value. They often last between seven and twelve years. They tend to reduce slightly each year until they hit zero but they can also be flat for years. Typically whole life insurance has the lowest surrender fees and universal life and variable life insurance have higher fees.

Ask for Surrender Schedule

If you want to figure out how charges change over time you can view the surrender schedule provided by your company. The surrender schedule will be a part of your actual policy contract. You can separately obtain your surrender schedule by contacting your life insurance company or agent. If you do not have your physical policy contract anymore, you should obtain another copy from the company.

A typical surrender schedule will be a simple table showing the year and corresponding surrender fee, expressed as a percentage of cash value. It may look something like this:

Policy YearSurrender Fee

If you partially surrender a policy the surrender fee will still be applied to whatever money you withdraw.

How to Calculate Surrender Value

The equation used to calculate surrender value is very simple. It can be stated as:

  • Current cash value minus surrender fees equals surrender value. So if cash value equals $100 and surrender fees are $10, surrender value is $100-$10 = $90.
  • Or cash value times (1 minus percentage of fee) equals surrender value. Said another way CV x (1-fee %) = SV. Where CV=cash value and SV=surrender value. So if cash value is $100 and surrender fees are 8%, the equation is $100 x (1-.08) = $92

How To Build a Larger Surrender ValueSurrender

Term life insurance has no surrender value, so you will need a permanent form of life insurance in order to build cash value. The best way to increase surrender value reliably is to make all payments on time as prescribed by the initial illustration. Avoid taking loans or partial surrenders (withdrawals of cash).

You may also build surrender value faster by overpaying premium payments into universal and variable policies. With a whole life insurance policy, this may require approval from the insurance company.

Whole life insurance policies allow owners to choose to reinvest dividend payments into the policy by purchasing more paid-up life insurance. This creates larger dividend payments in the future and the policy will grow in a compounding way. This is the best way to increase cash value in a whole life policy.

Universal and variable universal life insurance policies have flexible premium payment schedules.  This means that it is possible to pay more than the illustrated premium, as long as you adhere to TAMRA 7 pay limits (MEC rules) and guideline premium limits. By paying more money into the policies, the cash will accumulate faster than the insurance charges reduce it. Funding these universal policies very well, especially initially, will ensure that surrender value stays high in later years. If the performance of the policies is greater than expected, the surrender value will also increase proportionally to the rate of return. By directing investments wisely within a variable policy, the owner may affect their rate of return significantly, and grow their surrender value. If you own a variable policy it is smart to meet with your financial advisor at least once per year for an investment review and to make sure that your policy funding is on track to meet your goals.

How To Access Surrender Value To Get Cash

Owners can access their cash value one of three ways. They can take a partial surrender, a policy loan, or a full surrender of the policy. Each has different consequences.

Partial Surrender

Most policies allow owners to take partial withdrawals from their policies. This will reduce the total surrender value proportionally to the withdrawal and partial withdrawals are subject to surrender charges at the same rate as a full surrender.

Partial withdrawals may also be subject to a standard charge from the insurance company. A partial surrender will reduce the face amount of the contract permanently (the amount paid to beneficiaries upon the insureds death) by the amount of money taken out. Often times as long as there is no loan outstanding on the policy, a withdrawal can be made up to the entire surrender value. This will not put the policy into a grace period as long as a payment is made that at least covers the cost of insurance by the next premium due date.

Policy Loan

Loans are also allowed on permanent forms of life insurance, and the surrender value will be reduced by the amount of the loan. Loans are not subject to surrender charges. Loans do not necessarily need to be repaid, however, they will continue to accrue interest for as long as the loan is outstanding. Because the interest accrual over time may grow fairly large, always consider how likely you are to repay the loan when weighing the decision to withdraw from the cash value or to take a loan. In other words, if you never intend to repay the loan you are probably better off with a partial surrender.

The advantages of loans are that they are not taxable, they do not have any charges other than interest, and they do not reduce the face value of the contract permanently if they are paid back before the death of the insured.

Full Surrender

The third way to access the surrender value is to actually surrender the contract in full. This means that the life insurance coverage will no longer exist, no more premiums will be due, and the amount of the cash surrender value will be sent to the owner of the contract. This allows the owner to obtain the full surrender value of the policy by giving up all life insurance coverage. A surrendered policy can not be reinstated.

Why Life Insurance Companies Charge Surrender Fees

Life insurance companies charge surrender fees as a way to generate additional revenue, and to incentivize people to hold onto their policies longer. Life insurance policies are actually quite expensive to underwrite, process, and issue. If the owner surrenders the policy right away the life insurance company may lose money. Surrender charges are a way for them to protect themselves a bit financially. Furthermore, if people hold onto their policies past the first few years they are much more likely to hold onto them for a lifetime. If life insurance companies can help push people to hold their policies longer they will make more money overall.

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