Why Would the Cash Surrender Value of Life Insurance Decrease?

The cash surrender value of a life insurance policy can decrease for several reasons. Understanding what impacts cash surrender value is important if you ever need to cash out your permanent life insurance policy.

What is Cash Surrender Value in Life Insurance?

Cash surrender value refers to the amount of money you would receive if you cancel your permanent life insurance policy and withdraw the accumulated cash value. It’s essentially the lump sum payout you’d get if you terminate your coverage.

Permanent life insurance policies like whole life, universal life, and variable life have a cash value component that builds up over time. Some of your premium dollars go toward the death benefit coverage and some go toward building cash value.

The cash value earns interest and grows on a tax-deferred basis inside the policy. If at some point you no longer need life insurance, you have the option to cash out and take the surrender value rather than continuing to pay premiums.

Cash surrender value is different from cash value. Cash value is simply the current dollar amount in your policy’s cash value account. Cash surrender value is the cash value minus any surrender charges or fees the insurer deducts when you cancel your coverage permanently.

Why Cash Surrender Value Can Decrease

There are several reasons the cash surrender value of a permanent life insurance policy may decline, including:

Surrender Fees

Most life insurance policies charge surrender fees if you cancel your coverage in the first 10 to 15 years. These fees directly reduce the cash payout you receive.

For example, let’s say your cash value is $15,000 but your policy has a surrender fee of $1,500. Your cash surrender value would be $13,500 after the fee is deducted.

Surrender fees tend to be highest in the first year of a policy, often starting at around 7% to 9% of the cash value. Fees then decrease by 1% or so each successive year before ending after year 10 or 15.

Loans Against the Policy

If you borrow against your policy’s cash value, the outstanding loan balance reduces your cash surrender value.

For example, if you borrow $5,000 against your policy and the loan remains unpaid, your cash surrender value will be decreased by $5,000 to repay the loan if you cancel the policy.

Unreimbursed Withdrawals

Some permanent life policies allow you to withdraw a portion of your cash value. However, withdrawals can reduce your cash surrender value dollar-for-dollar like loans.

If you make a $2,000 withdrawal from cash value and don’t reimburse it, your net cash surrender value will be lowered by $2,000 compared to before the withdrawal.

Poor Investment Performance

With some types of permanent life insurance, the cash value is invested in the market. Poor investment performance can therefore cause your cash value and surrender value balances to decline.

For example, cash value in universal life policies is invested in interest-bearing accounts. If current interest rates decrease, your cash value earns less interest.

Variable life policies invest cash in equities like mutual funds. A bear market causing investment losses will reduce your cash value.

Cost of Insurance Charges

Another factor that can slowly reduce cash value over time is the monthly cost of insurance (COI) charge deducted from your policy.

This charge covers the insurer’s actual cost of providing death benefit coverage based on factors like your age and health status. As you get older, monthly COI fees increase, eating away at cash value.

Policy Loans

If you borrow against your permanent life insurance policy, interest charges on the loan can decrease your cash value if left unpaid.

For example, a $10,000 policy loan at 6% interest would generate $600 a year in interest fees. If you don’t repay the interest from your own pocket, it gets deducted from cash value.

Examples of Cash Surrender Value Decreasing

Here are some examples of how common scenarios can reduce the cash payout when you surrender a policy:

  • You have a $100,000 cash value, but your policy has a 10% surrender fee in the first year. Your cash surrender value is $90,000 after the $10,000 fee is deducted.

  • Your cash value is $80,000. You took out a $30,000 policy loan that remains unpaid. Your cash surrender value is lowered to $50,000 to repay the loan balance.

  • Over 10 years, your variable life policy’s cash value grew to $50,000. But market losses in the 11th year reduced the cash value to $40,000, lowering your cash surrender value too.

  • Your cash value was $25,000 five years ago. Monthly COI fees over 5 years reduced it to $22,000, decreasing your potential cash surrender value as well.

Strategies to Preserve Cash Surrender Value

To maximize your cash surrender value if you ever cancel your permanent life insurance policy, consider these tips:

  • Avoid cashing out policies in the first 10 to 15 years when surrender fees are highest.

  • Minimize borrowing against cash value to limit loan interest costs. Use other sources of financing if possible.

  • Limit partial cash value withdrawals and reimburse any amounts taken out to restore cash value.

  • Discuss investment mix with your life insurance agent to balance cash value growth and stability.

  • If costs of insurance rise significantly, request a lower death benefit to reduce monthly COI rather than letting fees eat at cash value.

  • Run periodic illustrations on your policy to project future cash value and surrender value under different conditions.

  • Consider laddering multiple smaller permanent life policies rather than one large policy to provide more flexibility.

What to Do if Cash Surrender Value Dips Too Low

If your cash surrender value declines more than expected and you’re unhappy with the projected payout, you may have options to improve the situation, such as:

  • Pay additional premiums to boost cash value.

  • Change the investment mix to aim for better returns on cash value.

  • Take a policy loan at favorable rates to halt further losses rather than cashing out.

  • Discuss reducing your death benefit with the insurer to cut monthly COI fees.

  • Negotiate to lower or remove surrender charges if you must cash out due to financial hardship.

  • Exchange your existing permanent policy for another one with lower fees or better performance outlook.

  • Sell your policy to an investor for a price between the current cash surrender value and death benefit.

Cash Surrender Value FAQs

Here are some common questions related to cashing out permanent life insurance and cash surrender value decreases:

Does cash value equal cash surrender value?

No, cash surrender value will virtually always be less than current cash value. Cash value is simply the amount in your policy account before fees or deductions. Cash surrender value accounts for surrender charges, loans, and more when you cancel a policy.

Can you lose cash value in whole life insurance?

It is possible for whole life insurance cash values to decrease, but not likely. The cash value growth in a whole life policy is guaranteed by the insurance company. However, things like loans and withdrawals can reduce cash value dollar for dollar.

Do universal life policies accumulate cash value?

Yes, universal life insurance includes a cash value component that grows on a tax-deferred basis. The policyowner can access cash value through loans or withdrawals. However, cash value and surrender value in universal life policies are not guaranteed.

Does cash value disappear when the insured dies?

No, the beneficiaries of the life insurance policy receive the remaining death benefit, including any cash value, when the insured person passes away. Cash value does not disappear at death. Beneficiaries can take the funds as a lump sum or potentially set up annuity payments.

What happens to cash value at age 100?

With most whole life policies, coverage remains in place for life, including the cash value component. With universal or variable life policies, coverage typically expires at age 100 or 120. At that point, the policyowner would receive the cash surrender value if they cash out the policy.

The Bottom Line

Cash surrender value in permanent life insurance can decrease for several reasons even as you continue paying premiums. Surrender fees, loans, withdrawals, investment losses, and rising policy costs all chip away at cash value over time.

Monitoring these factors gives you a better idea of how much cash you could expect if you eventually terminate your policy. With proper planning, you can take steps to maintain cash value and maximize your cash surrender value if you do decide to cash out your permanent life insurance coverage.

What Does Cash Surrender Value Mean On Life Insurance Policies?


Why is my life insurance cash value going down?

The cash value can decrease if the indexes fall. With variable universal life, the cash value is invested in various subaccounts of stocks, bonds or mutual funds. This kind of policy offers the greatest potential returns but comes with the risk that you could lose some cash value if the investments tank.

Does cash surrender value fluctuate?

The cash surrender value can be determined in a couple of ways based on the different types of life insurance policies. For variable life policies, the value of the investment fluctuates with the sub-accounts that it is invested in. For a whole life policy, the value grows at a rate determined by the insurance company.

What happens when a life insurance policy is surrendered for its cash value?

Surrendering your policy cancels your life insurance immediately. Your insurer will terminate the coverage and send you a check for the policy’s cash surrender value. Cash surrender value is the balance in your policy’s cash value account, minus any surrender fees.

Why is surrender value less than premium?

The surrender value of a policy is based on the portion of premiums that went into the cash value account plus the interest rate paid or investment gains. Outstanding loans are subtracted from this amount, along with any surrender fee.

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