How is surrender value calculated?

Calculating the Cash Surrender Value of a Life Insurance Policy

The cash surrender value (CSV) of a life insurance policy represents the accumulated savings portion of the policy, net of any surrender charges. It reflects the value you can receive if you surrender the policy and discontinue coverage.

How is Surrender Value Calculated?

The calculation of CSV involves the following factors:

• Policyholder’s Contributions: The total premiums paid into the policy, excluding any fees or charges.
• Accumulated Interest and Dividends: Earnings credited to the policy based on the policy’s investment performance.
• Surrender Charges: Fees imposed by the insurance company when you surrender the policy before a certain period (typically within the first few years). These charges gradually decrease over time.

The CSV formula typically looks something like this:

CSV = (Policyholder’s Contributions + Accumulated Interest and Dividends) – Surrender Charges

Benefits of Longer Holding Periods

Generally, the longer you hold a life insurance policy, the higher its CSV will be. This is because:

• You have more time for interest and dividends to accumulate.
• The surrender charges gradually reduce over time.

As a result, surrendering a policy early can result in a lower CSV compared to waiting several years before doing so.

Considerations

While a higher CSV can be beneficial, it’s important to remember that:

• Cash surrender value is not guaranteed and can fluctuate with market conditions.
• Surrendering a policy before its maturity date will result in the loss of future death benefit coverage.
• There may be tax implications associated with cashing out a life insurance policy.

Therefore, it’s essential to carefully consider your financial goals and objectives before deciding to surrender a policy. If you have questions or concerns, consulting with a financial advisor or the insurance company is recommended.