There may be a time in life whereby a policyholder becomes interested in canceling his or her life insurance policy. Most often, this may occur when the policyholder is looking to reduce his or her retirement-related expenses. So, what is at stake when a person decides to leverage the cash surrender value option? Are there other alternatives available to the policyholder that can be considered?

When a policy is surrendered or canceled, you are forfeiting the death benefit protection offered in the policy. Simply put - it is equivalent to cash out on your life insurance policy. As a result, there are no further premiums that the former policyholder would be required to pay.

When a policyholder pays insurance policy premium, including policies for whole life, universal life, or variable universal life, there are various buckets that the premium mainly supports. They include:

- Contribution towards the death benefit protection provided by the policy

- Fees and Costs associated with the policy

- Remaining amounts are deposited into the cash value of the account

The cash surrender value represents the amount of money that the policyholder would receive after all fees and charges have been assessed minus the actual cash value during the surrender period. Before you get the payout, fees are taken out from the cash values, and the money you get is given in exchange when you give up your right to the life insurance or portion of death benefits. 

When calculating the cash surrender value in your policy, various factors are taken into account. For example, the time length the policy has been in force will be considered along with the total amount of premium that you have paid into the policy. Furthermore, the interest amount, dividends, or capital gains earned by the policy's cash value are also taken into consideration. Some fees and charges will be taken into consideration. For example, charges can remain in effect several years after the purchase in some cases. When the prescribed period gets elapsed, the value of cash value gets equal to the cash surrender value. It will also consider the fees for cash surrender amount and charges that the insurance company will evaluate for liquidating the policy. 

So, what other options are available that would avoid extra fees and charges? What considerations can be made to ensure your loved ones are still covered? You can also access the value of cash surrender in your policy to keep the policy in force while taking out the loan from the policy using accumulated cash value taken as collateral. It is also a better alternative as the beneficiary would still be eligible for receiving the death benefits protection that the policy covers.

Alternatively, when you need to settle your cash value policy, you can purchase the term insurance policy with the use of cash payouts. This will ensure that you can replace the death benefit protection you are forfeiting when you liquidate. The cost of term insurance is much lesser, and it can ensure your loved ones(s) are covered when you evaluate the remaining cash value.