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 with value remaining). This is not necessarily the same as the cash value, which is calculated before any fees are taken upon surrender.

Surrender Charges Reduce Surrender Value

The difference between the cash value and the surrender value are typically the surrender charges, which can be significant at times especially for some universal life and variable universal life insurance products.  Surrender charges typically drop over time though, and while always significant they may not impact the surrender value substantially in later years.  Typically, surrender charges will be imposed on a contract during the first 10-15 years of a policy’s life.  After the surrender charge period is over, the cash value and surrender value will be the same.

How To Build Surrender ValueSurrender

Surrender value can only be built on permanent forms of insurance, as term life carries no cash or surrender value.  The best way to increase surrender value is to make all payments at the times prescribed by the initial illustration.

The best way to increase surrender value faster than by making premium payments in a timely manner is to make greater payments to the insurance company.

With a whole life insurance policy, this may require approval from the insurance company, though any excess premium payment is held in an escrow account, the value of which will be returned to policy owners upon surrender.  Whole life insurance policies also allow owners to chose where to direct dividend payments.  Directing dividend payments either into the cash value of the insurance, or to buy more paid-up whole life insurance, will help increase the surrender value over time.

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) as well as guideline premium limits.  By paying more into the policies, the owner can expect a higher total return within the policy.  Funding these universal policies well, especially initially, will ensure that surrender value stays high.  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 differently within a variable policy, an owner may affect their rate of return significantly, and thereby their surrender value.

How To Access Surrender Value

Most policies allow owners to take partial withdrawals from their policies.  While this will reduce the cash value, and the surrender value, of the policy, it is a helpful feature that many policy owners take advantage of at some time.

Partial withdrawals may be subject to a standard charge from the insurance company, as well as possibly surrender charges as well depending on the policy.  Always inquire about any possible charges before you make a withdrawal, otherwise, you may be handing your insurance company a big chunk of your hard-earned money!  A withdrawal will reduce your cash value and surrender value by the amount of gross withdrawal, and will also reduce the face amount of the contract (the amount paid to beneficiaries upon the insureds death) by the amount of the withdrawal as well.  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.

Loans are also allowed on permanent forms of life insurance, and the surrender value will be reduced by the amount of the loan.  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 significantly reduce cash surrender value, 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.  Advantages of loans are that they are not taxable, usually do not have any charges associated with the transaction, and they do not reduce the face value of the contract if paid back before the death of the insured.

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, but the downside is the loss of coverage.  A surrendered policy can not be reinstated.

If the option exists to take a withdrawal equal to 100% of the cash surrender value, at Life Ant we generally like to see our clients access the surrender value in this way rather than by actually surrendering the contract.  Even if no more premium payments are made, the insurance coverage will last longer because the policy will go through a grace period.  This also allows the policy to be reinstated during the period of time when the owner has reinstatement rights.  There are usually not any advantages to surrendering the contract in full, rather than just obtaining the full surrender value through partial withdrawal.  Always inquire if this option exists at your insurance provider, and have the consequences of both decisions explained fully.

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