Surrender value

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What you get when you give up a policy.

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Surrender value is the amount of money you’re entitled to receive when you voluntarily terminate (or “surrender”) certain life insurance or annuity contracts. The final value may be adjusted to reflect surrender charges (i.e., fees associated with the surrender), any outstanding loans you may have against the policy, or other provisions specified in the contract. That’s why the number displayed as your policy’s “cash value” or your annuity’s “contract value” isn’t necessarily the amount you’ll receive if you surrender and cash out.

Surrendering also means giving up the contract’s benefits. If you surrender a life insurance policy, your coverage ends and your beneficiaries won’t receive a death benefit when you pass on. When you surrender an annuity, you give up the contract and future income it was designed to provide.

Surrender value generally applies to financial products that accumulate value over time and allow the owner to end the contract in exchange for some or all of that value.

The most common examples are permanent life insurance (including whole and universal life policies) and deferred annuities. Some long-term care insurance policies or hybrid insurance products may also have a surrender value or provide other benefits if you cancel the policy.

In general, term life insurance policies don’t have a surrender value because they don’t accumulate cash value. If you cancel an ordinary term policy, you stop paying premiums and the coverage ends, but there’s no accumulated value to cash out.

Cash value is the amount that has accumulated inside a permanent life insurance policy. How quickly it grows depends on the type of policy and factors such as:

Cash surrender value is the amount you actually receive if you terminate the policy and take the money.

Suppose your permanent life insurance policy has a cash value of $50,000. If the insurer assesses a $3,000 surrender charge and you have a $7,000 outstanding policy loan that must be deducted, your cash surrender value could be:

$50,000 – $3,000 – $7,000 = $40,000

The policy has accumulated $50,000, but surrendering it would put only $40,000 in your hands.

Annuities have the same distinction. Your annuity may show an account or contract value of $100,000, but that doesn’t guarantee that surrendering it today will result in a $100,000 payment. Surrender charges can change the amount you receive, and with some contracts, a market value adjustment (MVA) may be applied. An MVA adjusts the surrender value based largely on changes in interest rates between when you bought the annuity and when you surrendered it, and it can increase or decrease the amount you receive.

Permanent life insurance is designed to remain in force for your lifetime, provided you continue to meet the policy requirements. If you no longer want or need the coverage, you can surrender the policy to access its value. Once you’ve contacted the insurer to request a surrender, it will calculate your cash surrender value, deducting any applicable surrender charges and outstanding policy loans, and pay you the balance.

Once the surrender is completed, the insurance contract ends. You no longer have coverage under that policy, and your beneficiaries no longer have a claim to the death benefit. That can make surrendering different from borrowing against a policy or making a permitted partial withdrawal, which can give you access to some of the cash value without surrendering the policy. However, withdrawals and loans can reduce the death benefit or create other complications.

Before surrendering a life insurance policy, consider whether you still need the coverage and whether replacing it later would be difficult or expensive. Life insurance generally becomes more expensive as you age, and developing health problems can raise the cost further or make it harder to qualify for a new policy.

Annuities use similar terminology, but the underlying product is different. A deferred annuity is designed to accumulate money and potentially provide income later.

Many annuities have a surrender period, particularly during the first several years of the contract. During this period, the insurer may charge you for withdrawing more than a specified amount, or for cashing out the annuity entirely. This fee is called a surrender charge.

Suppose an annuity has a contract value of $80,000 and a 5% surrender charge applies to a full surrender. Assuming no additional adjustments, the surrender charge would be $4,000, leaving a surrender value of $76,000.

Surrender charges typically decline as the contract ages and eventually disappear. You may see a contract impose a 7% surrender charge in the first year, followed by 6%, 5%, and progressively lower charges until reaching zero. The schedule varies by contract.

Some annuities allow limited penalty-free withdrawals, such as a specified percentage of the value each year. Additionally, certain fixed annuities use an MVA, which can raise or lower the surrender value based largely on changes in interest rates. Generally, if interest rates have risen since you bought the annuity, the MVA reduces the amount you receive; if rates have fallen, it can increase it.

There isn’t one surrender value formula, because contract terms vary. But the basic calculation looks like this:

Contract or cash value – surrender charges – loans and other applicable deductions ± contract adjustments="surrender" value

For example, an outstanding life insurance policy loan and any unpaid interest would reduce the amount you receive. With an annuity, a surrender charge can reduce the payout, while a market value adjustment can increase or decrease it.

How long you’ve owned the contract also matters. Cash surrender values can be relatively low during the early years of some permanent life insurance policies because of insurance costs and expenses. Similarly, annuity surrender charges are often highest early in the surrender period.

Your policy statement or contract documents should show the values and charges. You can also ask the insurer for a current surrender value quote—the amount you would receive if you surrendered the contract now—before deciding whether to terminate the contract.

Receiving money from a contract doesn’t automatically mean the entire surrender value is taxable. In general, you’ve already paid income tax on the money you used to pay the premiums, so you’re taxed on the gain rather than getting taxed on that money again.

For life insurance, the taxable gain is generally the amount you receive above your cost basis in the policy—essentially, what you’ve paid in premiums, adjusted for items such as dividends, refunded premiums, and certain policy loans.

Suppose your adjusted cost basis in a life insurance policy is $60,000 and you surrender it for $75,000. The $15,000 is generally considered taxable income. An insurer would report this amount on Form 1099-R.

For an annuity, the first thing to determine is whether it’s qualified or nonqualified. A qualified annuity is purchased through a tax-advantaged retirement plan, such as an IRA or 401(k). Because contributions to these accounts are often made with pretax money, all or most of the amount you receive when you surrender the annuity is typically taxable as ordinary income.

A nonqualified annuity is purchased outside a retirement account with money that has already been taxed. When you fully surrender a nonqualified annuity, you generally owe ordinary income tax only on the earnings. The portion representing the money you put into the contract—your cost basis—is returned tax-free.

If you’re under age 59½, the taxable portion of an annuity surrender can also be subject to a 10% additional federal tax unless an exception applies.

Surrendering a life insurance policy or annuity means cashing out and walking away from the contract. The surrender value tells you what that exit is worth today after adjusting for applicable charges, loans, and other factors—but before any taxes you may owe. Remember, though, that you’re not just taking money out. You’re also giving up the insurance coverage or future annuity income the contract was designed to provide.

Surrender generally makes the most sense when your need for the cash now outweighs your need for those benefits later.