How to Calculate Cash Surrender Value of Life Insurance

Quick Fact
According to the LIAM (Life Insurance Association of Malaysia) statistics, the life insurance industry has provided a higher protection to the public, including 14.2% higher payout in maturity and cash surrender values, 6.7% higher insurance coverage, and 3.7% higher claims amount. Additionally, RM8.6 billion was paid as maturity amount and cash surrender values in 2013. This is a remarkable 14.2% increase as compared to the RM7.5 billion in 2012.
An insurance company offers life settlements as per stipulated terms and conditions. These conditions may very well be subject to change. Sometimes, if a policyholder feels that the policy may not be as beneficial to him as he thought initially, he can terminate it. When the policy is terminated, you will not receive the entire amount that you would have received otherwise. Instead, there will be certain deductions and other criteria to be followed. This amount is termed as cash surrender value. In fact, at times, the company itself may suggest the policyholder to terminate his policy so that they do not have to go in for a life settlement. Learn how to calculate the cash surrender value of life insurance through the paragraphs below.
  • Cash surrender value is also called ‘policyholder’s equity’, ‘cash value’, or ‘surrender value’.
  • It is the amount that the insurance company pays to the insurance owner on prior policy termination.
  • Prior policy termination means that the policy was voluntarily terminated before the maturity date.
  • It is the approximate savings amount that your entire whole insurance policy will hold.
  • Since the policy is being terminated before date, you will not receive the amount intended.
  • The amount will be subject to deductions, like surrender charges and loans.
  • Once this amount is paid, the policy is permanently canceled.
  • This option is quite beneficial for the insurance companies. Policyholders generally resort to this option if they find that the policy is not beneficial or if they do not intend to pay expensive premiums.
Cash Surrender Value = Policy Cash Value – (Surrender charges + loan interest + loan)
Terms Involved
Policy Cash Value

  • Whatever your policy type (whole life insurance, variable life insurance, etc.), it has a cash value at maturity.
  • This is subject to surrender charges and the like.
  • In case of permanent life insurance, it is the value that is paid to the policyholder’s family/beneficiaries upon his death.
  • It has a higher premium than a term insurance since it offers coverage for one’s whole life.

Surrender Charges

  • These differ from one policy to another, as well as within companies.
  • Generally, they are calculated as 7% of the policy’s cash value.
  • Also, they are in effect from five to ten years since the commencement of the policy.
  • All these details must be provided by the company at the time when the policy is drawn.
  • These charges spiral lower in amount as the policy matures. Normally, the reduction rate is one percent per year.
  • In layman’s terms, this charge is a fee that is levied on the policyholder since he has canceled the policy before term.
  • If the policyholder informs the company regarding the cancellation within a respectable time frame, and continues to pay the premium until then, these charges may be subject to change (there may be waives, depending on the company).

Loans and Loan Interest

  • Policyholders do take loans against their insurance, and promise to pay them back with interest.
  • These points need to be considered while making the cash surrender value payment. The related conditions need to be mentioned in the offer document as well.
  • If the holder borrows money against the policy (depending on circumstances), the money must be repaid with interest while he is still alive. This is what will maintain your cash value as it was earlier.
  • If he elects not to repay the loan at all, or if he expires before repaying it, the amount is deducted from the death benefit.
  • The same applies to cash surrender value as well. The loans and loan interest are deducted before payout.
Steps to Calculate
Step I:
Calculate your policy cash value. You can get a direct reply from your insurance company of course, but you must have an idea as well. Calculate your premium payments, your accumulated dividends, and decide how much you would have got had you decided not to terminate your policy beforehand.

Step II:
Calculate the surrender charges. This will be easier if a table schedule has been provided to you at the beginning of the policy. Or else, calculate it according to the number of years matured and the percent rate deduction. If you have a finance agent, he will calculate it for you. Keep yourself abreast of the value anyway.

Step III:
This includes the loans you might have borrowed against the policy. If you intend to cancel the policy, obviously you may not have repaid the loans. Therefore, calculate the total amount along with the interest.

Step IV:
Add the surrender charges, loan amount, and interest amount. Keep the value aside. These comprise your entire deduction.

Step V:
Subtract the value obtained in step IV from the policy cash value calculated in step I. This is your cash surrender value.

Essential Tips and Warnings
  • The entire payout that the holder’s beneficiaries will obtain is certainly much more than what the holder will receive as cash surrender value, i.e., the amount will be much lesser than the actual policy cash value.
  • The termination of policy, thus, if viewed this way, is much more beneficial for the insurance company.
  • You can take loans against your policy and pay no tax. However if your policy lapses, you will have to pay taxes.
  • During the initial years of your policy, the savings are very less when compared to the humongous premiums you pay.
  • Once the cash surrender value is paid, the insurance company has no more obligations towards the holder, i.e., in essence, he will not remain a policyholder at all.
  • Some people still go in for this, if only not to pay the premium amounts.
  • Depending on the policy, the holder can withdraw 10-15% of the cash value per year, without being subject to surrender charges.
  • In terms of definition, the surrender charge is just like a sales charge; its value reduces as the policy ages.
  • Up to a certain point, the cash surrender value is not taxed. This limit is up to the total premiums paid. However, it will be a deduction of the total dividends earned during the life of the policy.
  • In other words, since you have used the tax amount for premium payment, you will not be taxed.
  • If you want to avoid taxation on the dividend amount, use the cash value as a collateral when you take a loan. If you do not do so, you will need to pay taxes when you cash out the policy.
Any kind of investment involves risks. Be careful while making or canceling the policy. Hire a well-read financial agent to give you the right advice. You need to check the current market value, position, terms and conditions, etc., before taking a call on canceling your policy. That’s because these parameters may change and you may miss out on a good settlement if you are not careful. Good luck!