Cash Value vs. Cash Surrender Value Explained

Summary: Cash value life insurance lets you access savings through loans or withdrawals while your policy stays active. Surrender value is the reduced amount you receive if you cancel your policy, and it may be taxable.

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If you own or are researching a permanent life insurance policy, you may come across the terms cash value and surrender value. While they sound similar, they aren’t the same. And confusing the two can lead to unexpected taxes, smaller payouts or reduced death benefits.

We’ll break down how cash value and surrender value are calculated, what affects them and how to use each strategically. You’ll understand how both work so that you can avoid costly mistakes and know what to expect with each.

What is cash surrender value in life insurance?

The cash surrender value of life insurance is the amount you get back if you cancel your permanent life insurance policy. Your insurer pays your cash value minus surrender charges and any outstanding policy loans.*

You may want to surrender your life insurance policy for different reasons. For example, you might no longer need coverage, find the cost of their premiums unaffordable or want to receive the policy’s cash value as a lump sum.

Surrender fees are typically highest in the first five to ten years and help the insurer recover initial costs. In the first year, you may even get nothing back if you cancel the policy, since the surrender charges often equal or exceed the policy’s early cash value.(2) You can check your policy agreement for the surrender fee schedule.

The trade-offs of canceling a policy

Canceling a policy isn’t without trade-offs. You lose your death benefit, and if your payout is higher than the total premiums you’ve paid, you may owe taxes on the difference.

Qualifying for a new traditional whole life policy later may also be difficult if your health has changed since you first took out your policy. If this is the case, guaranteed issue whole life insurance may be an alternative. These policies typically don’t require a medical exam or ask any health questions.

If you’re thinking about surrendering your policy, talk with your insurer or a financial professional first. There may be other ways to access your cash value without giving up your coverage.

What is cash value in life insurance?

Cash value in life insurance is the savings component built into permanent life insurance policies. It isn’t available with term life insurance. You'll frequently find cash value with these types of life insurance:

Each time you pay your premium, a portion goes into a tax-deferred account within the policy, where it can grow over time. The growth rate depends on the type of policy you have.

Any cash value left in your account when you die typically goes back to the life insurance company. Your beneficiaries only receive your policy’s death benefit. Our guide to whole life insurance cash value provides a comprehensive overview of this topic.

How can you use your cash value?

You can borrow against your cash value through a policy loan. These loans are generally tax-free as long as the policy stays in force. But if the policy lapses with an outstanding loan, the loan amount may become taxable.

Withdrawing your cash value is another option, though how much of your balance you can take varies by insurer.⁽¹⁾ There are a few instances where withdrawals could be taxed, so it’s important to speak with an accountant and your insurer about how you may be affected. You could also see your death benefit reduced by taking a withdrawal.

Lastly, some people use their policy’s cash value to cover future premium payments. This can be helpful during periods of financial strain. However, it should only be done in emergencies. Using your cash value this way is not typically recommended because it could cause the policy to lapse if there isn’t enough cash value left to cover your ongoing policy charges. If so, you'd have to step in and pay premiums again out of pocket. Additionally, any cash value taken out and not repaid could reduce the benefit.**

Cash value vs. cash surrender value

Now that you know what cash value and surrender value mean, it helps to see how they compare at a glance. The chart below highlights the key differences between the two to help you decide which may work best for you based on your goals.

How to calculate your cash or surrender value

Cash value and surrender value are calculated very differently, even though they’re tied to the same life insurance policy. Here’s what you need to know.

Cash value

There’s no universal formula for calculating cash value. It depends on your policy type, how long it’s been in force and how the value grows over time (guaranteed interest or market performance). Participating whole life policies may also pay dividends that help the account grow faster.

Generally, the longer you hold the policy and the more you’ve paid in premiums, the higher your cash value is.

Cash surrender value

Your cash surrender value is the amount you'd receive if you cancel the policy. You can use this formula to calculate it:

Surrender value = Cash value − surrender charges − outstanding policy loans

Your outstanding policy loans are any unpaid loans you've taken from the policy’s cash value, plus any accrued interest.

For example, say you currently have $25,000 in cash value and $3,000 left to pay on a policy loan. Based on your insurer’s surrender charge schedule, you know there’s a $2,000 fee if you cancel now. Here’s what your cash surrender value would be:

Surrender value = $25,000 - $2,000 - $3,000

Surrender value = $20,000

Should you tap into your cash or surrender value?

Your policy’s cash and surrender value offer flexibility when used thoughtfully, helping you meet financial goals or adapt to changing needs. Cash value may provide relief during periods of financial stress. You might use it to pay premiums, help cover emergency expenses or stretch your retirement savings if you want your savings to last longer.

The loans are generally tax-free if the policy stays in force. Withdrawals may also be tax-free, especially if you’re only taking out what you’ve paid in premiums. Just know that both options may reduce your death benefit. Moreover, if the remaining value falls too low, it could cause your policy to lapse.

Surrender value is a longer-term option. It may make sense if you no longer need coverage or want to cash out your policy completely. But surrendering ends your life insurance policy and may come with a tax bill if you receive more than you paid in.

If you’re unsure, speak with your insurer or a financial professional before taking action.

Frequently asked questions (FAQs)

Can I access my cash surrender value without canceling the policy?

No. The surrender value is available only if you fully cancel your life insurance policy. Your beneficiaries wouldn’t receive a death benefit anymore. Partial withdrawals or loans come from your cash value, not the surrender value.

Can I buy life insurance for my parents without them knowing?

No. Legally, your parent must consent and sign the application. They also need to participate in underwriting, if required.

How long does it take to build cash value?

Most policies take at least two to five years to start building cash value, and many more years before there’s a significant amount of money. (3) The growth rate depends on the type of policy and how long it has been in force.

What happens if I stop paying premiums?

Your policy may use the cash value component to cover premium costs. If there isn’t enough value left to keep the policy active, it could lapse and end your coverage unless you pay the premium yourself.

Is the cash surrender value of life insurance taxable?

It can be. If your surrender payout is higher than the total premiums you’ve paid, the difference is considered taxable income. You won’t owe taxes on the amount you paid into the policy, but any gain is taxed as ordinary income.

Is the surrender value guaranteed?

No. The surrender value can change over time. It depends on your current cash value, the policy’s surrender charge schedule and any outstanding loans or withdrawals. Always review your policy or contact your insurer for the most accurate estimate.

Sources

(1)Investopedia, Cashing in Your Life Insurance Policy, August 01, 2023

(2)Bankrate, What is cash surrender value?, March 03, 2025.

(3)CNBC, What is cash value in life insurance and how can you use it?, March 12, 2024.