The Life and Health Guru - Answering Life's General Insurance Questions

Impact Of The Cash Surrender Value

The Standard Nonforfeiture Law of Life Insurance can provide for the policyholder a cash surrender value in a number of different ways.  The surrender values can be provided the policyowner through cash, extended term life insurance, or paid-up cash value life insurance.  This insurance cash surrender value provides the owner of a life insurance policy at least a little bit of a guarantee of returned funds should they prematurely cancel their insurance contract.  The surrender value was established as a means to determine the value that would be allow in cases of early termination.

What Is Cash Surrender Value?

The life insurance cash surrender value is the simplest way in which the surrender value may be taken from the insurance policy.  After the contract has been in force long enough to no longer have an associated surrender charge, the surrender value of the policy and the cash available from surrendering the policy become the same.  Because of this congruence, this cash that can be obtained from cancelling a policy after the surrender charge passes is frequently referred to as the cash surrender value.

Despite the fact that the new laws require insurance companies to provide a cash surrender value to the account, they do not have to forfeit the account for cash until the policy has been in force for at least 3 years.  This stipulation in the law was created as a protection to the insurance companies, attempting to lessen the expense of writing small checks for the meager accumulated cash value the first couple of years.  Despite this stipulation in the tax law, most insurance companies choose to forgo this protection and begin to offer cash value as soon as the account develops any growth.

Another consideration for the cash surrender value of life insurance is that the insurance company is not required to make the cash request immediately.  The law permits a company to postpone the payment of the owed net cash surrender value for a period of up to six months after the initial demand.  This postponement is called the delay clause.  The delay clause was also created to protect the insurance company against any losses that they might have faced needing to relinquish funds in the short term.  Insurance companies take a conservative and long-term approach to their investment portfolio.  Sudden demands for cash could greatly damage the longevity and safety of the insurance company.

Again, despite the fact that the insurance companies have this protection, most choose to disburse the cash surrender value much sooner than the six month period.  Even when there was a run on Mutual Benefit Life Insurance Company, the company did their best to avoid invoking the delay clause on their policies.

Once you choose to terminate your insurance policy and take the cash surrender value, understand that you are also forfeiting the rights of protection as well. The death benefit that the insurance policy provided becomes null and void upon the contracts termination, with the exception of policies with a reinstatement clause built in.  The insurance company will have no further obligations to the policyholder.

Be sure that you have careful considered all of the ramifications of terminating your policy and electing to take the cash surrender value.  After you terminate your contract, you may no longer be eligible for the same type of coverage in the future.  Your cost basis, premiums, health rating, and death benefit will likely change with a new contract, if you are eligible at all.

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