Cash Value vs. Surrender Value: What's the Difference?

Jan 04, 2024 By Susan Kelly

Cash Value

The "cash value" refers to the total amount that accumulates a cash-value-generating perpetual life insurance policy throughout the policy's lifetime. It's the money you have inside your savings account. The insurance company or annuity provider puts a portion of the amount you pay for premiums towards bonds or other investments. The policy is then credited according to the performance of these investments. In the United States, it is technically unconstitutional for life insurance policies to advertise themselves in the form of an investment tool.

The cash value of an insurance policy that is permanent is created by a part of the premiums paid to the policy, in addition to dividends that are periodically credited to the insurance policy. The cash value from the policy can be used to boost the death benefit; however, it is also possible to use the money to pay living benefits. This includes the possibility to borrow in exchange for the policy's cash or to take partial withdrawals. If you take out withdrawals, the death benefit could decrease. If you make an entire surrender, all-cash value is taken out, and the policy will be canceled.

Surrender Value

It is the amount a policyholder will receive when they attempt to gain access to the value in cash of the policy. Other names include surrender cash value or the annuity surrender value in the case of annuities. In most life insurance policies, you can guarantee the value of your cash; however, it is only transferred when the policy has been canceled. The policyholder can borrow or take out part of their money. With universal life insurance, the cash value isn't assured. But, after the initial year, it may be partially forfeited.

In most cases, a penalty is imposed in the event of an early withdrawal of cash from an insurance policy. Most of the time, the gap between your policy's cash value and its surrender value are the costs for the early end. Since the insurance company does not want you to stop paying your premiums or request the early withdrawal of money, it typically adds different costs and fees into policies to discourage the possibility of canceling your policy. The surrender fee will decrease the value of your surrender.

These fees, along with the policy's surrender value, could fluctuate through the course of the policy, after a specific time when the surrender fees will cease to be effective. The cash value and your surrender value will be equal in this case. The method you use to access the cash surrender value is contingent on the type of policy you have; however, most require that you end the policy before using the money. If this is not an option, then it might be possible to take out a loan in exchange for the policy's cash value.

The Difference

The cash value is the amount of money that has been accumulated in the permanent life insurance policy or cash-value-generating annuity during the policy's or annuity's history. This value is also sometimes referred to as the account value. Your insurance company will put some of the money you pay them in the form of premiums toward various investments. After that, the credit applied to your insurance is determined by how well the investments have performed.

As per the law in law in the United States, a life insurance policy can't be used for investment purposes. However, many policyholders utilize the variable-life insurance full life or universal life policies to build tax-efficient retirement assets. It is important to note that term life policies can't create cash value. In contrast, it is the amount an insured person will receive if they decide to access the policy cash value. The penalty could be assessed if you take cash out of the policy before the due date.

Most of the time, the major difference between the surrender value of your policy or cash value lies in the cost for the early end of your policy. Insurance companies prefer that you continue to pay premiums and not request an earlier withdrawal of the funds. If you choose to end the policy, various costs and charges are made to dissuade you from making the decision.

The surrender fee could cause the value of the surrender to decline. The value of the surrender policy and the cost can change throughout the life of the policy. It will be over after an amount of time, and they won't be in force. This is when the value of the surrender and the cash value will be equal.

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