When you buy permanent life insurance, overtime it develops a cash value, since the premiums that you have paid for your policy, build a significant amount of funds. With the uncertainties of life, anyone can urgently need funds. Individuals consider cancelling their life insurance plans to get funds when needed. Cash surrender value is the amount that you will receive when you cancel your policy.
Meaning of cash surrender value
The meaning of cash surrender value is an accumulated component of an insurance policy that is paid if you choose to cancel your policy. Cash surrender value is only available in permanent types of life insurance, like endowment plans or whole life insurances. Whereas a surrender value is not applicable for temporary insurances like a term policy.
Types of cash surrender value
Before the maturity of your policy, if you decide to cancel your policy, cash surrender value is the amount that the insurance company will pay you. There are two main types of cash surrender values:
Guaranteed surrender value
A guaranteed surrender value, as the name suggests, is a fixed amount that is pre-decided when you buy life insurance. It is mentioned in the insurance contract and is usually payable after three years of the policy. The amount usually is 30% of the total premiums that you have paid until surrender, excluding the first premium. This amount also does not include any riders or bonuses associated with your insurance policy. Taking into consideration base premium alone, this value is derived. Use a life insurance premium calculator to get an estimate on your premiums and sum cover.
Special surrender value
Special surrender value is another type of cash surrender value. It depends upon the premiums, life cover, tenure of the policy, and bonuses received if any. The formula of special surrender value is:
(Paid-up value + accrued bonuses) X Surrender value factor
Here, the paid value is calculated by the basic sum assured X (premiums paid/premiums payable).
When you have whole life insurance, the insurance company guarantees cash value only at the time of surrender. However, instead of cancelling your policy altogether, you can withdraw a part of the cash value or take a loan against the overall cash value. You can opt for these loans at low-interest rates. They are tax-free, but if you surrender your policy, the amount of outstanding loan is taxable in the ratio of cash value earnings.
If you have a universal life insurance policy, there is no cash value guaranteed. However, you can partially surrender your policy after the first year. Universal life insurances have a specified surrender period during which you can surrender your policy. However, the charges of surrender are 10%. After the surrender period, there are no charges involved. Any amount of the surrender cash value that shows a cash value earning is taxable.
Difference between borrowing against your life insurance plans and cashing out
When you decide to surrender your policy, you get some cash value out of it. When you take a loan on your policy, you get funds. Policyholders use both ideas to get funds when needed. Here is the difference between them-
- When you choose to surrender your policy, you let go of all the benefits you would have received otherwise. Your nominee will not receive any death benefit as your policy would simply cease to exist after surrendering. Whereas, when you take a loan against your policy, your policy is still active and so are all its benefits.
- When you take a loan on your policy, you have taken a debt. If you cannot repay the debt, the lender will cash out your policy. When you surrender a policy, you cash out your policy for funds. Usually, it is better to take a loan as the interest rates are low and affordable. Also, with a loan, you do not have to worry about your family’s security in your absence as your life cover is intact.
Surrendering your policy for cash value
The cash surrender value is the cash value accumulated from your life insurance plans till the date of surrender. The more the tenure of the policy, the higher is the cash value as you have paid premiums for a long period. When you decide to surrender your policy, contact your financial advisor or your insurance agent to know the sum of funds you will receive. Once you have filled to surrender your policy, the waiting period is known as the cash value surrender period. Here are the documents needed while surrendering your policy:
- A surrender request form filled and signed with policy details and personal details
- Original papers of your life insurance
- Details of your bank account for fund transfer
- A cancelled cheque of the bank account in which you want the deposit
- KYC documents (all self-attested)
