Did you know that permanent life insurance policies accrue cash value over time? This is an essential feature of these plans that many underestimate, but it can actually be incredibly useful if you get into a financial pinch while you still hold your policy. But, it is important to note that the cash surrender value of your policy is entirely different from the cash value of your plan.
If necessary, you actually have the option to acquire the cash surrender value of your plan by canceling it when you choose. This is not always necessary, but it could be helpful to learn how cash surrender value works.
What is Cash Value?
Permanent life insurance policies accrue equity in the form of “cash value.” The cash value of a policy is determined by the amount you pay in premiums. In fact, a portion of your premiums is used to build the cash value every month.
This cash value also grows through interest. The interest is normally a guaranteed rate decided by the insurer, though indexed policies and the like may offer market-influenced interest rates depending on your plan. As the cash value in your policy grows, you have more options as to how you can borrow, spend, or leverage it.
What is Cash Surrender Value?
The cash surrender value is usually different from the actual cash value of your life insurance policy. Cash surrender value refers to the amount of money you get when you cancel your life insurance policy, rather than the amount of cash value accrued in the plan. While you may receive the cash value as part of the cash surrender value, other factors are calculated into the total surrender value.
Calculating Cash Surrender Value
When you cancel your life insurance policy, the insurer will start the cash surrender value calculation by determining how much cash value has accrued in your account. Then, they will likely deduct any surrender fees and outstanding balances you have on the cash value total. The remainder of funds are what can be defined as the cash surrender value.
Cash Surrender Value Example
If you have a whole life insurance policy that has accrued a cash value of $25,000, your insurer would offer you the opportunity to surrender the policy for a fixed fee. This fee could be 2%. If the fee is 2% and you have no other outstanding balances on your cash value, the insurer would deduct $500 (2% of $25,000) and give you the remaining $24,500.
Is Surrendering Your Life Insurance a Good Idea?
There are certain times when surrendering a life insurance policy makes sense, but it may not always be appropriate. If you can instead take a loan from the cash value of your policy, it may make more sense to do so. Otherwise, consult with a life insurance specialist to help you determine if surrendering your policy is in your best interest.
Do You Need Life Insurance?
Regardless of whether you plan to surrender your future policy or not, it is a good idea to have life insurance. Having the flexibility and peace of mind associated with these plans can be a true life saver. To learn more about the policies available in your area, get in touch with an agent from All Things Insurance today!