What is cash surrender value?

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• Permanent life insurance policies have a cash value, in addition to a death benefit.
• If you cancel a permanent life insurance policy, you receive the cash value, less any fees or loans. This is known as cash surrender value.
• Cash surrender value has tax implications that should be discussed with your accountant or tax advisor.
• Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

There are two types of life insurance: permanent life and term life. Term life insurance is best suited to younger people who want to protect their family, and it only lasts for a specific period of time. Unlike term life insurance, permanent life insurance never expires.

Permanent life insurance has a cash value component in addition to the death benefit that's payed out to your loved ones after you die. You can take a loan on the cash value or use it as collateral during your lifetime, tax deferred. This is why permanent life insurance is considerably more expensive than term life insurance.

If you decide you no longer want your permanent life insurance policy, you can cancel your policy and receive the cash value, less any loans you've taken out. This process is also referred to as surrender value, cash surrender value, or cash value surrender.

Permanent life insurance has a cash value

Cash value is a unique feature to permanent life insurance policies. All permanent life insurance policies have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value —  in the insurance company's portfolio, stock market, or annuities.

The initial years of a permanent life insurance policy are  expensive compared to what you'll pay in the future. "In the early years of overpayment, the cash value put inside the policy earns interest and you use that bucket of money to offset the cost of insurance when you're older," said Mark Williams, CEO of Brokers International.

You can use the cash value of permanent life insurance during your lifetime, for things such as paying your children's college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.

Quick tip: A cash surrender value has tax implications that you should discuss with an accountant or tax professional.

What is cash surrender value?

If you cash in your permanent life insurance, there's no more death benefit; you are literally canceling your policy. This is also known as cash surrender value — giving up a permanent life insurance policy that has cash value.

Williams warned that because the money inside the policy has been growing on a tax-deferred basis, you will pay taxes on the cash value upon surrendering the policy. Some insurance companies also have fees associated with a cash value surrender, depending on how long you have the policy and when you surrender the policy. This varies based on the provider, so it's important to review your policy for cancellation terms and fees that might be incurred. 

If you borrowed money or took out a loan against your permanent life insurance policy's cash value, you don't pay tax on the loan, but you pay interest. Williams said the loan is basically borrowing from the insurance company using your policy as collateral. He noted the insurance companies will allow you to borrow money instead of a withdrawal  — which could trigger taxes. 

If you cancel your insurance policy while still having a loan on the cash value, you will receive the cash value minus the outstanding loan balance and any fees associated with canceling your policy. You will also have to pay taxes on the cash value received. Before surrendering your permanent policy, consult an accountant or tax professional on the tax implications.

Consult an expert before making any changes to your policy

If you cancel your permanent life insurance and you don't have other life insurance in place, like a term life policy, you may want to get that lined up before going without coverage. Also, remember that permanent life insurance is more than a death benefit; it's an opportunity to build wealth and fund your retirement. If your needs have changed, consult your financial advisor and estate planner before making any changes to your insurance.

You should also contact your insurance agent to go over the process for canceling a permanent life policy and to discuss associated fees, especially if you have an outstanding loan. 

If you're currently considering permanent life insurance, it's wise to consult an accountant and financial advisor about your financial situation and goals to determine which policy is best for you and the tax benefits and implications. It's worth taking the time to find the best policy for you, because once you've signed on the dotted line, it's a lot more difficult to make changes if you need to adjust your coverage.

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Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.