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What Is Surrender Value (Cash Surrender Value) in Insurance and how is it calculated?

  • 10th Oct 2019
  • 5,073
What Is Surrender Value (Cash Surrender Value) in Insurance and how is it calculated?

Do you ever wonder about the cash value of your life insurance policy? If you want to cash out on your policy, you need to determine its surrender value.

Surrender Value Meaning:

The cash surrender value is defined as the accumulated component of an insurance policy that is paid if you cancel the same. You need to remember that the surrender value is available on traditional insurance plans such as whole life or endowment plans. Surrender value is not applicable if you purchase a term plan.

Cashing out on your life insurance

When you surrender your life insurance plan, you are canceling the coverage and availing of the accumulated cash value. When you cash out on the insurance policy, the insurance company levies certain charges. These charges are reduced from the accumulated cash value on your policy.

Before deciding to surrender your insurance, you need to remember that the result will be the loss of life coverage. If you require money, you may consider borrowing against your life insurance policy.

Cashing out versus borrowing against your life insurance policy

When contemplating the surrender value in insurance, you may refer to one of the two following ideas:

1. The investment value you will receive when you surrender your policy in lieu of the life coverage offered under the plan. When you choose this option, your nominees do not receive any policy benefits in case of an unfortunate event as you decide to cash out the accumulated value on the same before its maturity.

2. The amount you may be able to borrow against your insurance coverage during its duration.Under this option, you can avail of cash on your policy without foregoing the insurance coverage. Generally, the interest rate on such borrowed amount is low and affordable.Both the aforementioned options allow you to avail of cash on your insurance policy albeit in different ways.Both the aforementioned options allow you to avail of cash on your insurance policy albeit in different ways.

How does ’cash value’ work in a life insurance policy?

To understand how to calculate cash surrender value of life insurance, you need to comprehend its working. You pay a premium to procure insurance coverage. A portion of this premium is used towards providing the life coverage and administrative fees and the balance is invested by the insurer on your behalf. This portion earns returns through such investments, which are then provided as accumulated benefits.

How is the cash value of a life insurance policy calculated?

The cash value in a life policy accumulates over the years. Therefore, when you pay the premiums regularly for a longer period, the cash value of the policy increases. This is because the investible component of the premium has a longer time to grow.

To know what is surrender value in insurance, it is recommended you ask your financial advisor or directly procure the calculation from the insurer. You also need to know the surrender period. It is the period that you need to wait before the policy has a cash surrender value.

Surrender fees:

Another aspect is the surrender fees charged by the insurer when you cancel the policy or withdraw funds prematurely. It is higher during the initial years and reduces as time passes.Before you decide to surrender the policy, it is recommended you ask the insurer if you can withdraw the cash surrender value and use some portion to buy a less expensive policy. You may choose to surrender your policy as you may not need it or want to purchase a new one. It is an important decision and you need to consider all factors before making your choice.

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