Definition
Cash Surrender Value is a term used in the insurance industry to refer to the amount of money an insurance policyholder is entitled to receive if they decide to discontinue the policy before it matures or the insured event occurs. It’s often associated with life insurance and permanent life insurance policies. The specific amount is typically stated in the policy itself and can sometimes earn interest over time.
Key Takeaways
- The Cash Surrender Value is the amount of money an insurance policyholder is entitled to receive if they choose to cancel the policy before it matures or if the policyholder dies.
- It is typically less than the total amount of premiums paid into the policy, due to fees and expenses incurred by the insurance company during the early years of the policy.
- Financial planning often involves considering the Cash Surrender Value of life insurance policies, as it can become a source of cash flow in certain situations.
Importance
Cash Surrender Value is a vital finance term, particularly in the field of insurance, as it signifies the amount an individual would receive if they choose to cancel their life insurance policy prematurely.
This sum of money serves as a source of cash that policyholders can access when needed.
It provides a safety net since it grows over time, offering a form of savings apart from the primary death benefit.
Therefore, this term is important as it gives policyholders an understanding of the cash value they can draw from their insurance policy, which can supplement their financial plans or serve as emergency funds.
Explanation
Cash Surrender Value is pivotal in the realm of insurance policies where it represents the value a policyholder will receive if they decide to voluntarily cancel the policy before its maturity or if the policyholder passes away. Essentially, it is the savings component of certain life insurance policies that one can access before the policy triggers a payout.
These specific types of policies are called cash value life insurance and include products like whole life, universal life, and variable life insurance. With premiums paid over the policy’s lifespan, part goes toward the death benefit and part goes toward building up this cash value.
The capacity to accumulate cash surrender value gives policyholders an opportunity to tap into monetary resources during emergency situations or times of financial hardship. Policyholders can withdraw a certain amount or borrow against it, functioning much like a loan that would only be repaid with interest if the policyholder wants to maintain the original death benefit.
If utilized properly, the cash surrender value can effectively function as a form of savings in addition to providing the policyholder with life insurance coverage. Understanding cash surrender values is essential as it impacts the policyholder’s financial decision-making process considerably.
Examples of Cash Surrender Value
Life Insurance Policies: The most common real world example of cash surrender value is in life insurance policies. Typically, in whole life or universal life policies, a component of your paid premium goes towards a cash value account, which accumulates over time. If the policyholder decides to surrender the policy prematurely, the insurance company will pay a certain amount known as the cash surrender value.
Annuities: Annuities are another example where cash surrender value plays a role. In a deferred annuity, the policy owner makes payments over time, and the insurance company agrees to make payments to the policyholder at a future date. However, if the policyholder decides to surrender the policy early, then they may receive the total amount of payments made into the annuity minus surrender charges. This is the cash surrender value.
Structured Settlements: Structured settlements paid as the result of a personal injury lawsuit can also have a cash surrender value. In such a case, the injured party could contact a financial institution and sell the stream of future payments in exchange for a lump sum now, which can be thought of as the cash surrender value.
Frequently Asked Questions about Cash Surrender Value
What is Cash Surrender Value?
Cash Surrender Value is the sum of money an insurance company will pay to a policyholder if the policy is voluntarily terminated before its maturity or the insured event occurs.
How is Cash Surrender Value calculated?
The Cash Surrender Value is calculated based on the sum of premiums paid and the interest earned on them, minus the insurance charges and any outstanding loans and their interest.
Can Cash Surrender Value be withdrawn?
Yes, policyholders can withdraw the Cash Surrender Value of their policy before its maturity. However, doing so will typically result in the cancellation of the policy and may also have tax implications.
What is the difference between Cash Surrender Value and Death Benefit?
The Death Benefit is the total amount of money the beneficiaries receive upon the policyholder’s death. The Cash Surrender Value, on the other hand, is the amount the policyholder receives if they decide to terminate their policy before they pass away or the policy matures.
Related Entrepreneurship Terms
- Life Insurance Policy
- Policyholder
- Premium Payments
- Nonforfeiture Rights
- Surrender Charges
Sources for More Information
- Investopedia: This is a well-respected online financial information website that offers definitions, examples, and more complex information on a variety of financial terms, including Cash Surrender Value.
- The Internal Revenue Service (IRS): The IRS website provides detailed information on tax-related aspects of Cash Surrender Value, especially relevant to U.S. audience.
- The Balance: This is a personal finance website that covers wide range of topics. It includes a large selection of articles that can provide more context and practical advice on Cash Surrender Value.
- NerdWallet: NerdWallet is a personal finance website that hooks in consumers with free financial tools and comparison shopping, but they also have substantial personal finance content which includes information on Cash Surrender Value.
