What is the cash surrender value of an IUL policy?
The cash surrender value (CSV) is the exit value of an indexed universal life (IUL) policy. It is the amount paid on a full surrender and the collateral for a policy loan. In the first years of a policy it sits well below the account value, because the surrender charge is at its highest.
How it is calculated
The insurer starts from the cash value, also called the account value, and deducts:
- the surrender charge for the current policy year, which falls over the surrender charge period and reaches nil at the end of it;
- any outstanding policy loan, with interest due.
Once the surrender charge period ends, the cash surrender value equals the account value less any loan. The CSV also has to meet the monthly cost of insurance and policy charges; when it falls short, the policy enters its grace period and can lapse.
Worked example
Illustrative figures, not a forecast. A policy has an account value of US$300,000 in year 5, on a typical 15-year surrender charge schedule.
- Account value: US$300,000.
- Surrender charge in year 5, 7%: US$21,000.
- Outstanding policy loan: none.
- Cash surrender value: US$279,000.
Later in the life of the policy, once the surrender charge period has ended, an account value of US$600,000 with a US$50,000 loan outstanding gives a cash surrender value of US$550,000. Only the loan is deducted.
In an international IUL
Capital for Life reads the account value column of an illustration rather than the net cash surrender value. In the early years the surrender value mostly reflects the surrender charge schedule, which typically runs for 10 to 15 years, so it understates how the policy is building. The CSV is the figure used on surrender, when a policy loan is taken and when the monthly charges are tested. Where an offshore trust or company owns the policy, a surrender pays the CSV to the trust or company as policyholder, and the tax on any gain depends on where the policyholder lives and, for a trust, where the settlor and beneficiaries live. For UK tax, an international IUL is treated in the same way as an offshore bond.
Common questions
Why is the cash surrender value lower than the account value?
The difference is the surrender charge, plus any policy loan and unpaid interest. The surrender charge falls over the surrender charge period and reaches nil at the end of the surrender charge period, typically 10 to 15 years from the start of the policy.
Can you borrow against the cash surrender value of an IUL?
Yes. The CSV is the collateral for a policy loan. Some insurers allow loans from the start, others from the second policy year. The loan and its interest must stay within the cash surrender value, or the policy can lapse.
Does an IUL have a minimum surrender value (MGSV)?
An MGSV, a minimum payout on surrender fixed in the contract, is a feature of some traditional savings and endowment plans. An IUL illustration shows the cash surrender value on several bases instead: Basis #1, Basis #2 and the contract's minimum crediting and maximum charges. On that last basis the surrender value can reach zero in later years.
Go deeper: loan or withdrawal, and the surrender charge schedule.
Cash surrender value is what the insurer would pay if an IUL policy were surrendered today: the cash value less any surrender charge, outstanding policy loan and unpaid loan interest.
