When talking about life insurance, you may hear the terms cash value and surrender value. While there is a connection between both terms, they are different. Therefore, it is important that you understand what both terms mean before buying a life insurance policy.
So what is the meaning of cash value?
Cash value is an amount of money that grows in the savings account of your life insurance policy. A portion of the premium you pay is put into investments. Your insurance provider then adds the profit of the investment to your cash value or savings account.
What’s the meaning of surrender value?
On the other hand, a cash surrender value refers to money you receive from your life insurance provider when you cancel your policy before the stated time.
It is important to note, that cash value and cash surrender value are only available with permanent life insurance policies.
Below are the differences between cash value and cash surrender value.
- You can withdraw some of your cash value or take a loan against it while keeping your life insurance policy. However, once you collect cash surrender value; you no longer have life insurance.
- On the one hand, the cash value is an amount of money in your life insurance savings account. On the other hand, a cash surrender value is your life insurance savings with a surrender fee taken from it.
- Borrowing against your cash value will not attract tax charges. In contrast to cash value, a surrender value will lead to tax fees. In some cases, the tax charges are significant.
- If you wish to withdraw or borrow against your cash value, you will not have to pay a penalty fee. However, if you give up your policy before the agreed time, you will have to pay a fee. Giving up your life insurance policy after the maturity period means that your cash surrender value will be equal to your cash value.