Cash Surrender Value vs. Face Value Insurance
All life insurance policies have a face value. Term life policies have only a face value. A permanent life policy, on the other hand, can have both a cash surrender value and a face value. The amounts can differ substantially. Face value of a life insurance policy refers to the death benefits -- in other words, what the policy will pay the beneficiary in the event of the death of the insured. Cash surrender value refers to what the policyholder receives if the policy is cashed in prior to the death of the insured.
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Provider Rules
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How quickly whole life policies build cash value will depend on the company policy of the insurance provider, and it can be based on the amount of premiums paid and what types of investments the company utilizes. Each insurance company that provides life insurance policies has its own standards for determining cash surrender value. However, the policyholder usually can contact the company to find out the current cash surrender value of an active life insurance contract.
Accumulating Cash Value
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Initially, permanent life policies have little to no cash surrender value. Premiums must accumulate. In the first several years of a whole life contract, unless excessive premiums are paid, the contract may have no cash value. However, once cash value is established, the policyholder can surrender the contract and receive the accumulated earnings. Most often, the amount will be small when compared with the face value. Cashing out does forfeit future death benefits, because the policy is surrendered for its cash value.
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Administration Expenses
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The policyholder should not expect to receive what was paid in premiums when utilizing the cash surrender provision. The insurance provider subtracts company expenses or administration costs from the premiums and may retain surrender charges if the policy is cashed in.
Borrowing Cash Value
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A policyholder may have the option of entering a loan agreement and borrowing funds by using the cash value of the policy as collateral. The loan process does not cancel the policy. Borrowing against the cash value of a life insurance policy usually reduces the amount of the death benefit by the amount of the loan. In addition, interest accumulates on the loan, further reducing the death benefits. Consequently, the face value of the policy decreases during the loan period and, in some instances, cannot be reestablished at the original value.
On-time Premiums
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In order for the policyholder to maintain both the face value of a policy and steadily increase the cash surrender value, premiums must be paid on time. Generally, when life insurance contracts build cash values, the provider retains a portion of the paid premiums for death benefits and invests a portion to increase the cash value further. However, insurance policies are legal contracts and vary from company to company as to limitations and terms. To determine the rules and guidelines of an insurance policy with a cash surrender value, the policy itself will provide details specific to the individual contract.
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