Legal Definitions - Surrender value

The surrender value is the specific amount of money a policyholder receives if they choose to cancel or withdraw funds from a permanent life insurance policy or an annuity before its full maturity or before a specified period has passed. These types of policies often build up a "cash value" over time, which is the accumulated savings or investment portion of the policy. However, if a policyholder decides to access this cash value early, the insurer typically imposes fees, known as "surrender charges." The surrender value is the policy's accumulated cash value minus these applicable surrender charges.

It's important to note that if a policy has been held for a long enough period, as defined in the policy contract (often several years), these surrender charges may no longer apply. In such cases, the surrender value would be equal to the full cash value that has accumulated in the policy.

• Example 1: Canceling a Whole Life Policy Due to Unexpected Expenses

  Sarah purchased a whole life insurance policy ten years ago, and it has accumulated a cash value of $25,000. Recently, she faced a sudden, significant medical expense not fully covered by her health insurance. To cover this cost, Sarah decided to cancel her life insurance policy and access its accumulated funds. Because she is canceling within the first 15 years of the policy, the insurer applies a surrender charge of $3,000. The amount Sarah receives after this deduction, $22,000, is the surrender value.

• Example 2: Terminating a Universal Life Policy for a New Investment Opportunity

  Mark has held a universal life insurance policy for eight years, and its cash value has grown to $40,000. He recently discovered a promising real estate investment opportunity that requires a substantial upfront capital injection. Deciding to reallocate his assets, Mark chooses to terminate his universal life policy. His policy contract specifies a surrender charge schedule, and for an eight-year-old policy, a charge of $5,000 applies. The $35,000 that Mark receives after the surrender charge is deducted represents the surrender value of his policy.

• Example 3: Early Withdrawal from a Deferred Annuity for a Down Payment

  Maria invested in a deferred annuity five years ago, planning to use it for retirement income in twenty years. However, she found her dream home sooner than expected and needs a large sum for a down payment. She decides to withdraw $50,000 from her annuity, which currently has a total accumulated value of $60,000. Her annuity contract imposes a 7% surrender charge for withdrawals made within the first seven years. Therefore, a $3,500 fee (7% of $50,000) is deducted from her withdrawal. The $46,500 she receives is the surrender value of her partial withdrawal.