What is a Cash Surrender Value?

Cash surrender value is a term that applies to an annuity policy. It is the value of the contract if cashed in at a given point in time. The cash value of annuity or insurance policy is determined by the amount of money the policyholder has contributed and how the investments undertaken by the insurance company have performed.

How Does the Cash Surrender Value for an Insurance Policy Work?

Insurance policies come with benefits when they mature or upon death. The premiums accrue value as policy holders continue paying for them. The writer of the instruments (insurance company) invests premiums. When you surrender the policies (cancel all benefits) you will receive all the value from your premiums and return on investment. While it is not allowed to promote life insurance as an investment vehicle in the US, most people use their life insurance to grow their wealth with tax benefits. However, term life insurance policies have no cash values. Redemption value is calculated by subtracting surrender fees from the cash value. Surrender fees are taken to dislodge early cancellation of a policy. A beneficiary in need of liquid cash is allowed to borrow against their policy's value. However, if the policy holder can wait until maturity, there will be no fees or penalties associated with cashing in the insurance policy or annuity. Say you buy a life insurance policy with benefits of $200,000 upon death or maturity. After 10 years of consistent payments, you will have $10,000. If you wish to cash out at this stage, your insurance company will charge a fee, say 15 percent. This means that when you cancel the policy after 10 years, you lose 15 percent of $10,000 and you only get $8,500. Cash value does not mean the same thing with nominal value; nominal value is the benefit at death.

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