Explained by an Expert: What is a cash surrender value?

I’m going to talk a little bit now about cash surrender value and how it works in terms of a life insurance policy. Generally, cash surrender values apply to permanent policies, and permanent policies can be whole life coverage, can be Term-100, or can be universal life. Most Term-100 policies don’t have a cash surrender value, but whole life policies and most universal life policies do.

A whole life policy can either be participating or non-participating. Participating policies have a guaranteed cash surrender value, and they also have a dividend cash value. With universal life insurance, the cash value component is usually a little more flexible. Most of these policies have a minimum and a maximum premium, and anything you put in over the minimum premium goes into an investment account. You also have a lot of flexibility in terms of the type of investment you choose in a universal life policy. It could be a low-risk type of investment, like a GIC, money market, or bond fund, or it could be a higher-risk investment, like an equity fund or a specialty-type fund.

One thing to really look out for with the cash surrender value is if there are any surcharges; this can really eat away at the amount of value you might be able to take out. For example, if you had a universal life policy that had an 80 per cent cash surrender charge, and you have $10,000 in the policy, you could be charged as much as $8,000 in that instance in surrender charges.

If you are unsure, a good rule of thumb is to always make sure you ask a broker or ask your insurance company, and get your response in writing.

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