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What Is Cash Surrender Value of Life Insurance?

Cash surrender value is the sum of money an insurance company pays to an annuity or policyholder in the event that the life insurance policy is voluntarily terminated before its maturity date. It is the savings component of most permanent life insurance policies, particularly whole life, that are payable before death occurs. Cash value doesn't start to build up on a policy until premiums have been paid around two years. Term life insurance does not build up a cash value.

Types of Policies

The most common types of life insurance policies that build up cash value are called whole life, universal life and variable life. Cash value in these types of policies (like savings) is a financial asset and they do contribute to your overall personal net worth. Whole life insurance is "permanent" insurance that calculates your premiums based on the remainder of your expected lifespan. Your death benefit is reduced if you have any outstanding loans that are collateralised with the cash value of a whole life policy.

Making a Policyholder Loan

Some policies are used as collateral on a bank loan; other times a loan can be taken out directly from the insurance company. Life insurance policyholders borrow against the cash surrender value of their policies. The policyholder loan, if not repaid by the policyholder while alive, will be taken from the distributed proceeds to the survivor and/or beneficiary(ies). Also, a policy loan reduces the cash surrender value if the policy is cancelled prior to the policyholder's death.


A policyholder dividend is a partial return of the premium you paid on your policy, which returns a portion of the profit your policy contributed to your insurer's overall profitability. It usually does not affect the value of your policy or the amount you pay in premiums, nor should it affect your income taxes, but consult with the IRS or your tax attorney to be certain. Dividend payouts are not guaranteed because they depend on the company's financial results for the year. The cash surrender value of the policy is not affected by the distribution of dividends, if any occur.

Cash Surrender Value Vs.. Face Value

Cash surrender value is not the same as the face value of any life insurance coverage. The face value is the amount that will be paid to beneficiaries as long as the terms of the policy are met. The face value (actual death benefit) is always more than the cash surrender value. Surrender cancels the policy altogether. There are companies that buy out the cash value of a policy and take assignment rights to it.

Supplemental Life Insurance

Supplemental life insurance, sometimes known as SLIRP, uses a whole life insurance policy which is structured to generate a tax-deferred cash flow during retirement. The funding vehicle for the supplemental policy is usually a permanent (whole) life insurance policy. This type of policy can provide tax-deferred cash value accumulation, tax-free withdrawals under certain stipulations and a mostly tax-free death benefit to your beneficiary(ies).