September 27, 2019
Most permanent forms of life insurance have a feature built into them which grows the value of the policy over time, known as the Account or Cash Value. These types of policies include Whole Life, Universal Life and its variants- Indexed Universal Life and Variable Universal Life. A policy holder with any of these types of policies may be able to leverage the accumulated value of the policy to take a loan against the value, withdraw some or all of the value, pay the policy’s premium with it, or surrender the policy back to the insurance company for some amount of the account value (in some instances for the full cash value). But what is the difference between account, or cash value, and the cash surrender value?
Cash and Account Value
The Cash Value (also known as Account Value in some policies) is designed to grow over time as long as the planned premium is maintained by the policy holder of a permanent life insurance policy. For Whole Life policies, the account value is designed to grow steadily when the level, guaranteed, premium is met by the policy holder. With this type of policy, the policy holder cannot pay their premium with the account value but it is possible to take a loan against the value, or depending on the carrier take a partial withdrawal which as long as the amount is less than the premiums paid into the policy should be tax free (talk to your tax advisor!).
For Universal Life policy holders, as long as they pay the planned premium and the cost of insurance doesn’t jump up on them, their cash value will grow steadily. The Cash Value in a Universal Life policy grows when premiums paid into the policy are more than the monthly cost of insurance deduction, and is further buoyed by interest rates. It is important to grow the cash value of a Universal Life policy in the first half of the policy as the premiums will steadily increase as the insured ages, and the cash value will help offset this increase. A Universal Life policy holder who would like to tap the account value of their policy could take a loan against the policy with their insurance company or a partial withdrawal- but there will be less account value in the policy from that point forward to help cover cost of insurance increases.
Cash Surrender Value
If a policy holder of either type of permanent insurance policy needs to withdraw the value of the policy and no longer need the insurance coverage, they may also surrender the policy to the carrier in exchange for the Cash Surrender Value. This amount could be the same as the Account or Cash Value, but in many cases it is less than that amount. The Cash Surrender Value often has a Surrender Charge deducted from it, and if there was a policy loan taken out that would reduce the Cash Surrender Value as well. A policy holder can confirm these amounts with a quick call to their insurance agent or the insurance company’s customer service line.
But is taking a Cash Surrender the best option for a policy holder who no longer needs the insurance coverage? Not always. Many policy holders do not know that they may be able to sell their life insurance policy through a regulated transaction known as a Life Settlement. With a life settlement, the policy holder may be able to sell their life insurance policy, through a licensed life settlement provider or broker, to a third party buyer. The buyer pays the policy holder an amount less than the death benefit of the policy but more than the cash surrender value (if there is any), and in exchange the former policy holder no longer has any premiums to pay. A win-win for many policy holders who choose to explore this option!