A whole life insurance policy's cash surrender value represents the amount of money a policyholder receives if he chooses to terminate the policy. The calculation of cash surrender value is based on the savings component of whole life insurance policies. The longer the policyholder has contributed to the policy, the higher the eventual cash surrender value will be. Several factors go into calculating a policy's cash surrender value.

Premium Payments

The insurer bases the policy's cash surrender value on the total insurance premiums paid up to the termination date. Some whole life insurance policies allow policyholders to pay off premiums in later years with dividends from the policy's investments. These policies allow older policyholders to maintain their coverage after retirement. Since the dividend payments are part of the policy's cash value, these policies have lower surrender values than those in which the policyholder pays premiums out-of-pocket for the entire length of the policy. In the early years, the savings portion is minimal in comparison to the premiums paid. The cash surrender value could be less than the actual cash value of the policy. It’s important to know that by surrendering a portion of the cash value reduces the death benefit.

Cash Value

The cash value of the policy represents its accrued value. Factors that go into calculating the policy's cash value include the policy's face value, the premium payment term and the number of years it has been held. As the policyholder continues paying premiums, and as the funds in the policy itself increase in value from investments by the insurer, the cash value grows.

Loans and Taxes

Policyholders may use the cash value of their whole life policies as collateral for loans such as home improvement, auto purchase, or for education. Any unpaid loan principal and interest is deducted from the policy's cash value. Tax issues also arise when surrendering a whole life insurance policy. Since the policyholder paid the dividends with after-tax money that portion of the surrender value is not taxable. However, the dividends paid into the policy are taxable upon surrender.

Surrender Charges

Surrender charges vary among insurers, and even among policies from the same insurer. Insurers use surrender charges to dissuade policyholders from surrendering their policies until they reach maturity. The longer a policyholder maintains a policy, the lower the percentage the insurer will charge in surrender charges. The cash surrender value is then calculated by taking the full cash value and deducting the surrender charges, plus any unpaid loan principal or interest on the policy.