Expert: Willard R. Brumbaugh, LUTCF, CSFP - 10/22/2007

Question
About 21 years ago, my husband and I purchased a "flexible premium adjustable life insurance policy" -- $100,000 on my husband and $50,000 on myself.  The surrender value is currently at over $10,000.  What does this mean?  Are we able to use that money now?  Is there a penalty for using it?  Does it have to be paid back or is it actually our's to use?  Please explain what surrender value actually means.  Thank you.

Answer
Dear Susan,

There are two ways to look at the surrender value of your policy. You could view it as like the equity in your home. In which case you would be able to use it as collateral for a loan.

If you surrendered the policy you could consider it as the refund of insurance premiums that were not needed to pay for the term cost (mortality charges) of the insurance.

Due to the age of the policy it is likely that there would be no penalty for removing the money, but the death benefit would be reduced by the amount of withdrawal, and that fund would not be there to generate interest in the contract.

That interest is intended to absorb future mortality charges on a tax-free basis.

It is yours to use in the same way as the equity in your house is yours to use. As a surrender value, it is the same as the surrender value of your house. In either case you can acquire that equity by selling the house or the policy.

Personal comment: Judging by the relatively low equity in the policy, it appears that you have not adjusted your premium to make up for the reductions in interest being earned by the policy. If you do not make the necessary adjustments, the mortality charges will consume the remaining account value, putting your policy in danger of lapsing.

Willard R. Brumbaugh, LUTCF