7 Things You Should Know About the Cash Surrender Value of Life Insurance

The cash surrender value (CSV) of life insurance is the amount you can receive if you cancel a permanent policy with accumulated cash value. If you decide to cancel, the surrender value is what’s left after the insurer subtracts surrender charges and any outstanding loans or withdrawals from your cash value. In short, it’s the check you’d get if you cancel your policy.

Cash surrender value generally applies to permanent policies—whole life, universal life, and variable life. Term coverage doesn’t build cash value, so there’s usually no payout to “surrender.” If you’re weighing a change, this guide explains what is surrender value in life insurance, how to calculate cash surrender value of life insurance, where surrender charges come in, and the tax points to know before you make a move. We’ll also cover alternatives like loans or partial withdrawals so you can compare options before giving up coverage you may still need.

Cash surrender value is the amount you would receive if you cancel a permanent life insurance policy and take the money out. It isn’t the same as your cash value. Cash value grows inside the policy, and is a way to save money that can be accessed via loans or withdrawals in an active policy.

So if you’re confused about what is surrender value in life insurance, the CSV is basically what’s left of the policy’s cash value after the insurer subtracts any surrender charges and any outstanding loan balance or interest.

Definition and Differences

CSV answers a single question: “If I cancel the policy today, how much money would I get back?” Cash value is the internal account that can build over time through premiums and credited growth, and is different from the death benefit. (The death benefit is the amount your beneficiaries receive if you pass away while the policy is in force.)

In early policy years, CSV is often lower than the cash value itself because surrender charges and fees still apply. If you’ve taken withdrawals or loans, those amounts, along with any loan interest reduce what you’d receive. If the total you take out exceeds what you’ve paid in premiums, some or all of the gain may be taxable, but you’d want to confirm that with a tax professional.

Where CSV Applies (Policy Types)

CSV applies to permanent policies such as whole life, universal life, and variable life, because those policies were designed to build cash value. The cash surrender value of term life insurance is usually zero, because term doesn’t build cash value. If you decide to cancel a term policy, you just cancel it and coverage ends.

However, some return-of-premium term policies may have some surrender value, as they are designed to return your premiums to you if you don’t pass away during the term period. If you’re unsure which type you have, check your policy’s declarations page or your latest annual statement; they’ll show whether cash value is accumulating and whether surrender charges are in effect.

Cash surrender value is a simple idea with a few moving parts. Start with the current cash value in your policy (how to calculate cash value of life insurance policy is done by the insurer and is based on your policy type and how it’s performed).

Then subtract any surrender charges that apply, and subtract any outstanding policy loan and accrued interest. If you took a withdrawal, that amount is subtracted as well. What’s left is the cash surrender value – which is the amount the insurer would pay if you cancel the policy.

Calculation Formula

Here is how to calculate cash surrender value of life insurance as a formula: Cash surrender value = (current cash value) minus (surrender charge) minus (outstanding loan including accrued interest) minus (withdrawal or transaction fees). Here are a few quick examples so you can see it in action.

Simple example:

Detailed Example:

Some contracts also deduct small administrative amounts due at surrender. Your latest annual statement will show whether surrender charges are still in effect and the size of any loan. Please note, these are examples, not quotes. Actual figures depend on your contract, the surrender charge schedule, and any loan or fees shown on your statement.

Surrender charges are designed to recoup early policy costs. They decline over time and eventually disappear. Your contract and state rules control the exact schedule.

Typical surrender fee ranges and phase out timeline

Most permanent policies include surrender charges in the early years that decline annually and typically disappear after about 10–15 years.(1) The exact schedule is shown in your policy and illustration; charges are highest at the start and step down over time.

Impact of early surrender vs. long-standing policies

Walking away in the early years can leave you with much less than the stated cash value because the surrender charge and any loan balance are deducted from your cash value balance. You may also owe tax on any gain you receive. By contrast, surrendering after the schedule has tapered can yield more because little or no surrender charge remains.

If you’re on the fence, ask about alternatives that preserve value, such as reduced paid-up coverage, a partial withdrawal, a policy loan, or a 1035 exchange to a new policy. A review of your statement, along with a discussion with a licensed agent, can show which option keeps the most value aligned with your goals.

If you need money from a permanent policy, you have options that keep some or all of your coverage in place. Two common approaches are withdrawals and policy loans. Each affects cash value and the death benefit in different ways.

Withdrawals 

A withdrawal pulls cash directly from the policy’s cash value. It lowers the amount left to grow and usually lowers the death benefit by the same or a stated amount, depending on the contract. Some policies charge a small transaction fee or limit how much you can take in a year.

Withdrawals are often first applied against your “basis” (generally what you paid in premiums) and may be tax-free up to that amount, with amounts above basis potentially taxable. Because every policy handles reductions a little differently, check your illustration or statement to see exactly how a withdrawal will change the remaining benefit.

Policy Loans

A policy loan lets you borrow against available cash value without a credit check, using the policy as collateral. Interest accrues on the balance, and while many contracts allow flexible repayment, any unpaid loan and interest reduce the cash value and lower the death benefit. If the balance grows too large (especially during a period of poor performance) you may need to add premium to keep the policy in force.

Loans are generally not taxed while the policy stays active; however, if a policy lapses or is surrendered with a loan outstanding, some or all of the gain may be taxable. If you plan to borrow, set a simple check-in schedule to track the balance and interest, and consider asking your insurer (and a tax professional) how loan mechanics work on your specific contract.

Taxes on life insurance depend on what you take out and how you take it out. A few factors drive most outcomes. The sections below are for general education; a tax professional can speak to your situation.

CSV up to Premiums Paid vs. Gains Above Premium

Your “basis” is generally the total premiums you’ve paid, minus any amounts already returned to you tax-free. If you surrender a policy, you’re typically taxed only on the portion that exceeds your basis.

In plain terms, the insurer compares what you receive (including any loan that’s paid off at surrender) to what you’ve paid in. If the payout is higher, the difference is usually taxable as ordinary income. If it’s lower, there’s no taxable gain. Your annual statements show total premiums paid and any prior distributions that affect basis.

Withdrawals vs. Loans vs. Surrender: Tax Differences

Withdrawals are often treated as coming first from your basis, so many policies allow tax-free withdrawals up to what you’ve paid in, with amounts above basis potentially taxable. Policy loans are generally not taxed while the policy stays in force, but interest accrues and the balance reduces cash value and death benefit.

If a policy with a loan lapses or is surrendered, part of the loan can be treated as distributed income and may have tax implications. A full surrender ends the policy and triggers the gain calculation in one step. If you’re replacing coverage, ask a financial professional about a tax-deferred 1035 exchange instead of a cash surrender. This can move value to a new policy without recognizing gain when done correctly under IRS rules.

Surrendering is a big decision. It can free up cash, but it also ends your coverage. Use the examples below to see when it can be reasonable, then weigh the trade-offs before you act.

Real-life Scenarios

• Income need: If money is tight and premiums are competing with essentials, a surrender can provide relief. Some people use the cash to clear high-interest debt or stabilize their budget.
• Adult children: If you no longer have dependents and don’t need the death benefit for estate or legacy plans, keeping a permanent policy may not serve a clear purpose. In that case, a clean exit can simplify your finances.
• Low returns: If the policy has underperformed and you prefer a simpler approach, you might decide your dollars work better elsewhere. Before you surrender, compare alternatives such as a reduced paid-up option, a partial withdrawal, or a 1035 exchange to a policy that fits your goals more closely.

Considerations

Surrendering ends the death benefit and any riders tied to the policy. If you need coverage again later, new underwriting could mean higher costs or limited eligibility.

You may face surrender charges in the early years and taxes on any gain. Ask the insurer for a current surrender quote and a summary of total premiums paid so you can see the tax picture. Check for options that preserve value. 

A reduced paid-up election can keep a smaller benefit with no further premiums. A policy loan or partial withdrawal can provide cash while maintaining coverage, if the funding still supports the policy. A 1035 exchange can move value to a new policy without triggering tax when done correctly under IRS rules.

If surrender still makes sense, time it thoughtfully. Waiting until surrender charges decline or reach zero can keep more money in your pocket, provided you do not need the cash immediately.

Cash surrender value works a little differently depending on the kind of permanent policy you own. Here’s how it typically looks in practice.

Whole Life

Whole life includes a guaranteed cash value schedule that grows each year, as stated in the contract. If the policy is “participating,” it may also pay non-guaranteed dividends. You can take dividends in cash, use them to reduce premiums, or buy paid-up additions that increase both cash value and the death benefit.

Early on, surrender charges can keep the life insurance cash surrender value below the policy’s stated cash value; those charges decline over time. Any withdrawals or loans reduce what you’d receive at surrender and can lower the death benefit.

Universal/Variable Life

Universal life credits interest to cash value at a declared rate; indexed UL ties credits to an index; variable life (VL) and variable universal life (VUL) invest in market subaccounts you select. Because returns can change, the cash surrender value in these designs moves with performance and policy charges.

Consistent funding helps support both the death benefit and the account through ups and downs. Some versions, such as guaranteed universal life (GUL), emphasize a no-lapse guarantee and often build little cash value, while VL and VUL offer higher growth potential with higher volatility and fees. Loans or withdrawals reduce value in any of these formats and need to be actively monitored so the policy stays in force.

In short, life insurance cash surrender value is the amount you’d receive if you cancel a permanent policy after subtracting any surrender charge and outstanding loan with interest. It’s different from the cash value that builds while the policy stays in force.

Before you surrender, compare alternatives like a withdrawal, a policy loan, reduced paid-up coverage, or a 1035 exchange, and check for possible taxes on any gain.