The cash surrender value is the amount of money that you would receive from the insurance company should you decide to cancel an existing coverage. This value is calculated by the insurance company based on how long you’ve had the policy, how well you’ve funded it, how many outstanding loans you have on it, and how much money you’ve withdrawn from the policy over the years.
The insurance company identifies the cash surrender value on the policy’s annual statement, and this number is the one you would use to determine the size of policy loan you can take. You can also ask your advisor to confirm what that value is anytime during the year. Depending on the ACB (see “Adjusted Cost Basis”), the cash surrender value might be partially or possibly completely taxed at your Marginal Tax Rate, which could represent a significant tax bill. Your advisor again should be able to provide this information before you decide to cancel a policy.
Please keep in mind that the more mature a policy is, the more efficient it gets. This means that as the policy matures, for every dollar of premium paid, the cash value inside the policy grows by more than a dollar. That’s why there usually are some better alternatives to cancelling a policy, like putting the premiums on offset (see “Premium Offset”), or setting the policy as reduced paid up (see “Reduced Paid-Up Insurance”). These would allow you to avoid triggering taxes, while still receive some value out of the asset that you’ve built over the years.
Finally, keep in mind that by surrendering a policy in the very early years, you will likely get back less than what you’ve paid in, as these policies are not get rich quick schemes and take time and discipline to grow.