How to Calculate Cash Surrender Value of Life Insurance

How to Calculate Cash Surrender Value of Life Insurance

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If you have life insurance, you might be wondering if it’s possible for you to get cash from it, and if so, how much?

Depending on the type of life insurance you have, the answer is yes! Some life insurance policies do allow you to get cash from them.

These types of policies typically are considered permanent life insurance, which is a policy that doesn’t expire as long as you keep making premium payments.  Such policies have a savings component as well as the death benefit. If your insurance policy is whole life or universal life, it will likely fall in this category.

 

However, tapping into your life insurance policy can also raise a number of questions: how much will you get? Is it taxable by the IRS? What does cash value in life insurance even mean?

We’ll address these popular questions and more as we work to help you understand your policy and the cash value options that come with it.

What Does Cash Value Mean in Life Insurance?

If you have a life insurance policy which has a cash value component, in the early years of the policy a portion of every premium payment pays for the cost of insurance and fees with the remainder going toward the policy cash value.  The policy cash value is effectively a savings account, designed to supplement the policy premiums paid in the later years of coverage. 

 

Death benefit: the amount that is paid out to beneficiaries when the insured passes away

Cash value: the portion of your policy that typically earns interest and is available for you to withdraw

or borrow against while you’re still alive

Cash value account also offers the chance for people to use the money accumulated in their policy, which is typically done for a number of reasons. Most commonly, it can be used to help cover for financial emergencies, such as medical expenses, moving, or adjusting to retirement. Next, we’ll cover some of the ways you are able to get cash from your life insurance policy.

How Can I Get Cash From My Life Insurance Policy?

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FAQ On - How to Calculate Cash Surrender Value of Life Insurance

Q: How Can I Get Cash From My Life Insurance Policy?

There are more than a few ways to get cash from your life insurance policy.Which option you choose will depend on your financial needs and what makes sense given your current situation with your policy.

 

Cash surrender: If you want to stop making payments on your policy, you have the option to work with your insurance

company to cancel it (and the death benefit) and receive its cash surrender value.

 

Withdrawal: Just as it sounds, a withdrawal allows you to receive money from your policy. However, it can cause a reduction in your death benefit, may not be tax-free, or could reduce the cash surrender value - causing a potential increase in your future premiums

 

Loans: As a cash value policy, you’ll have the opportunity to borrow that accumulated cash value from the policy. There will

be interest charges, but in some circumstance the balance can  remain outstanding through the life of the policy with the loan deducted from any death benefit payout.

 

Life settlement: An option for those exploring the secondary market outside of their issuer, a life settlement occurs when the policy is sold for cash to a third party who takes over both the premium payments and the death benefit

How much cash you are able to get from your policy depends on a number of factors:

 

which of the options you choose above, how long your policy has been in effect, what type of policy it is, and so forth. It’s worth noting that only a few types of policies have this option, so we’ll cover them next.

 

Cash value life insurance is also called permanent life insurance. Permanent life insurance stays with you as long as you continue making premium payments and lasts until the death benefit is ready to be paid.

Types of permanent life insurance include whole life and universal life.

If you have one of these, your policy will have cash value.

Contrary to these types of permanent life insurance, term life insurance does not have a cash value component.

Term life insurance is used to guarantee the death benefit if the policyholder passes during a specific term. Once this term expires, it can be renewed, allowed to expire, or possibly converted into a whole life insurance policy.

Term life insurance comes with no other value other than the guaranteed death benefit, and the premium is generally based on age, health, and life expectancy.

Q: Is the Cash Surrender Value of Life Insurance Taxable by the IRS?

When you receive cash from your life insurance policy, there’s two aspects to it: First, the principal, which consists of the premiums that you have paid. This is usually considered the tax-free portion of it. Second, there is the amount of money that the cash value portion of policy has earned since you purchased it. This can consist of dividends, interest, and capital gains. This will be considered taxable income in most situations.

Q: What is the Cash Value of My Life Insurance?

When you receive cash from your life insurance policy, there’s two aspects to it: First, the principal, which consists of the premiums that you have paid. This is usually considered the tax-free portion of it. Second, there is the amount of money that the cash value portion of policy has earned since you purchased it. This can consist of dividends, interest, and capital gains. This will be considered taxable income in most situations.

Don’t lose your lifelong investment. Discover your policy’s value today.