How to access the cash surrender value without cancelling your insurance

The cash surrender value is the amount you can receive when you cancel your insurance. It is possible, however, to benefit from the cash surrender value without forfeiting your insurance. How?

Here are three options:

A policy loan (or advance) is where you borrow money using your insurance (its cash surrender value) as collateral. Because it’s a loan, you will eventually have to repay the amounts borrowed plus interest. If you die before paying off the loan, the insurer will subtract the amounts owed plus accrued interest from the amount of insurance payable.

You could also borrow money from another financial institution using your insurance as collateral.

Example

You have a $100,000 life insurance policy with a current cash surrender value of $15,000. You borrow $7,000 against the cash surrender value and interest accrues on the borrowed amount. Assuming you die a few years later and $2,000 in interest has accrued on your loan, the insurer will pay out $91,000 ($100,000 minus $7,000 for the loan and $2,000 in accrued interest).

Under an option called “reduced paid-up insurance”, you can ask the insurer to apply the cash surrender valueCash surrender value is the amount the insured may receive from the insurer when he voluntarily cancels a life insurance contract before maturity. Not all insurance coverage offers a cash surrender value. to purchase a lower amount of life insurance than the amount specified in the initial contract. Although the amount of insurance will be lower, you’ll no longer have to pay premiumsAn insurance premium, or premium, is an amount that a person or company must pay on a regular basis to keep their insurance in effect. For example, if Mary has to pay $200 per year to keep her life insurance in effect, then the premium is $200.
The insurance premium should not be confused with the face amount, or insured amount, which is the amount that the insurance company has to pay out. In the same example, if Mary has life insurance that pays $100,000 to Peter upon her death, then the face amount is $100,000.  and you’ll be covered for life.

Example

You are paying an annual premium of $500 for a $100,000 life insurance contract. Your insurer may give you the option of using the contract’s cash surrender value to purchase $25,000 in fully paid-up life insurance, which means you will continue to be covered for the rest of your life and won’t have to pay any more premiums.

With this option, you can ask the insurer to apply the cash surrender valueCash surrender value is the amount the insured may receive from the insurer when he voluntarily cancels a life insurance contract before maturity. Not all insurance coverage offers a cash surrender value. to purchase term life insurance. You’ll continue to be covered for a specific number of years and no longer have to pay any premiumsAn insurance premium, or premium, is an amount that a person or company must pay on a regular basis to keep their insurance in effect. For example, if Mary has to pay $200 per year to keep her life insurance in effect, then the premium is $200.
The insurance premium should not be confused with the face amount, or insured amount, which is the amount that the insurance company has to pay out. In the same example, if Mary has life insurance that pays $100,000 to Peter upon her death, then the face amount is $100,000. .

Example

Let’s go back to the previous example in which you have a $100,000 life insurance contract with a $500 annual premium. Your insurer may give you the option of applying the cash surrender value to purchase Term 10 life insurance. You won’t pay any more premiums and you will continue to be insured for $100,000. However, if you’re still alive after the 10-year term, the contract will terminate and you’ll no longer be covered.

The universal life insurance accumulating fund

Some contracts do not offer a cash surrender value as such, but that doesn’t mean you’ll be left with nothing if you cancel your contract. With universal life insurance, if you cancel the contract, you will keep the amount saved up in the accumulating fund, minus the applicable fees. The accumulated amounts are sometimes called the “cash surrender value”, but are referred to here as the “accumulating fundA capitalization fund is the amount accumulated in a universal life insurance policy.”.

The accumulating fund holds all the amounts accumulated in your universal life insurance. The amounts are invested according to your instructions. You can make withdrawals from your accumulating fund without cancelling your insurance; however, fees will be charged. The cost of insurance and applicable fees are periodically deducted from the fund. You must therefore keep enough money in the fund to at least cover the cost of insurance and applicable fees. Note that some universal life insurance contracts may also offer a cash surrender value.

Other questions and answers

Is the cash surrender value guaranteed?

The cash surrender value you accumulate over the years may be set in advance and may or may not be guaranteed. Check your contract. Sometimes only a portion of the cash surrender value is guaranteed.

The cash surrender value varies according to factors such as the number of years you’ve held the insurance and the premium paid. There is often no cash surrender value in the initial years. In all cases, the method and table used to determine the cash surrender value is required to be included in the insurance policy.

In the event of death, is the cash surrender value paid in addition to the amount of insurance?

No. In the event of death, the amount of insurance is payable but not the cash surrender value. With universal life insurance, depending on the contract, you could also receive all or some of the amounts in the accumulating fund.

What happens if you forget to pay the insurance premium?

If you don’t pay your insurance premium but your contract includes a cash surrender value:

  • The insurer will generally use the cash surrender value to pay the premium (automatic premium loan). It’s a loan because you’re not entitled to the cash surrender value until you cancel the insurance. You’ll pay interest on the loan and could end up with a cash surrender value that is not sufficient to pay the premiums.
  • Depending on the terms of your contract, your insurer could decide, instead, to convert your whole life insurance into reduced paid-up insurance. In other words, you’ll be insured for a lower amount but won’t have to pay premiums ever again.