Cash Surrender Value – Definition

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Cash Surrender Value Definition

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.

A Little More on What is Cash Surrender Value for an Insurance Policy

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.

References for Cash Surrender Value

Academic Research on Cash Surrender Value

  • The concentration of personal wealth, 1922-1969, Smith, J. D., & Franklin, S. D. (1974). The American Economic Review, 64(2), 162-167. This is a paper that examines the creation of Wealth in America between 1922 and 1969. It examines factors that contribute to the concentration of personal wealth and how individuals used insurance policies to safeguard wealth.
  • A comparative analysis of household wealth patterns in France and the United States, Kessler, D., & Wolff, E. N. (1991). Review of Income and Wealth, 37(3), 249-266. This paper observes that in the US, household wealth is more unequally distributed than in France. By calculation the Gini coefficient in the US was found to be 0.77 while in France it was 0.71. The paper also looked at the composition of wealth; in the US, 19 percent of wealth was on securities and 30 percent in owner-occupied housing while in France 50 percent of wealth was on owner-occupied housing and 8 percent on securities.
  • Modeling surrender and lapse rates with economic variables, Kim, C. (2005). North American Actuarial Journal, 9(4), 56-70. This paper looks at factors that contribute to surrender rates including the difference in crediting rates and reference, financial crises, policy age, unemployment, seasonal effects and economic growth rates. The paper uses logit function and complementary log log function to model surrender rates. The paper shows that the two models above are better at modeling surrender rates. The paper also shows that the surrender rates are different for different insurance policies.
  • Wealth holdings and poverty status in the US, Wolff, E. N. (1990). Review of Income and Wealth, 36(2), 143-165.  This paper looks at how families below poverty line are better off in wealth than income. In general, the paper concludes that the elderly poor are better off in wealth than the younger poor. It also looks at pension, social security wealth and inclusion of annuity in relation to poverty and wealth creation.
  • How does life settlement affect the primary life insurance market?, Fang, H., & Kung, E. (2010). (No. w15761). National Bureau of Economic Research. This paper looks at the effects of life settlement market on structure of long term contracts by primary market for life insurance.
  • The spread of aggressive corporate tax reporting: A detailed examination of the corporate-owned life insurance shelter, Brown, J. L. (2011). The Accounting Review, 86(1), 23-57. This study examines at the spread of aggressive corporate tax reporting by examining at decisions of firms to adopt corporate owned life insurance. The study examines how social environment factors determine tax shelter adoption. The study finds that there is weak evidence that COLI uses spreads geographically and there is no evidence that COLI use is concentrated among audit firms.
  • Replacement of Life Insurance: Comment, Trieschmann, J. S. (1976). The Journal of Risk and Insurance, 43(1), 156-161. This paper looks at risks of insurance and the replacement of life insurance. It is a general overview of insurance policies and how people use these policies for wealth creation.
  • Trends in household wealth in the United States, 1962–83 and 1983–89, Wolff, E. N. (1994). Review of Income and Wealth, 40(2), 143-174. This study looks at the increasing inequalities in household wealth between 1983 and 1989. Over that period, median wealth increased by 8 percent while mean wealth increased by 23 percent. Over the period, the Gini coefficient increased from 0.80 to 0.84. The paper showed that the increase in wealth inequality was due to income inequalities, increase in stock prices and slow inflation.
  • Life Insurance and Life Settlements: The Case for Health‐Contingent Cash Surrender Values, Fang, H., & Kung, E. (2017). Journal of Risk and Insurance. This paper examines the presence or absence of cash surrender values in life insurance policies and why where CSVs are available they are not adjusted for for health status. It shows that there is a problem in commitment with CSVs in life insurance contracts where policyholders go for short term contracts.
  • Why do life insurance policyholders lapse? The roles of income, health and bequest motive shocks, Fang, H., & Kung, E. (2012). National Bureau of Economic Research.  The study looks at the factors that cause insurance policy holders to lapse. Specifically, the study examines the role of income, health and of bequest motive shocks in lapsation. The paper notes that income and health are more important as factors of lapsation than bequest motive shocks.
  • A financial decision framework for life insurance policy replacement, Forster, M. D., & Carson, J. M. (2000). Financial Counseling and Planning, 11(1), 39-47. This insurance is viewed as an important component in long-term financial plans. However, though it is viewed as a long term investment, policy replacement still remains high. This study looks at factors that influence policy replacement decisions. The findings in this study can be used by professionals in the financial service, educators, consumers, issuers and regulators.

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