What is the Cash Surrender Value of a Life Insurance Policy?
This article explores the cash surrender value of life insurance policies in greater detail, providing insight into how it is calculated, the tax consequences of receiving the cash surrender value, and its accounting treatment for businesses.
What is Life Insurance?
In the simplest form, insurance exists as a means to transfer risk from one party to another. This contract usually forms when the insuree (policyholder) agrees to an exchange of scheduled payments (referred to as premiums) for a lump-sum payout (or guaranteed stream of payments) at some point in the future.
Can You Cash in a Life Insurance Policy?
Yes, generally a whole life insurance policy holder can withdraw cash up to the policy basis (cash premiums paid into the policy less any fees or expenses). Further, a cash withdrawal up to the policy basis usually suffers no tax consequences because proceeds from life insurance policies are not taxable generally.
What is Cash Surrender Value?
The cash surrender value represents the sum of money an insurer pays to the policyholder or an annuity contract holder when surrendering the life insurance policy. In the case of life insurance, this amount calculates as a discounted payout from the full value of the death benefit.
How do Premium Payments Affect the Cash Surrender Value?
The insurer bases the cash surrender value of the policy on the total premiums paid up to the termination date. Therefore, as the insuree pays premiums, the cash surrender value of the policy will grow.
Are Life Insurance Proceeds Taxable?
For all life insurance policies meeting the definition of life insurance, any cash surrender value increases for the policy would not have a taxable impact until received. Further, the death proceeds would avoid taxation.
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