The life insurance policy provides two benefits: (1) the death benefit and (2) the cash surrender value.  Both are two mutually exclusive benefit streams in real life.  If one’s heirs collect the death benefit, he can no longer surrender the policy.  Likewise, if one surrenders the policy, one’s heirs cannot collect a death benefit.  Therefore, the valuation requires an actuarial calculation using mortality factors.

The fair market value of the policy cannot be less than the cash surrender value, because a policy owner is free to surrender the policy right away and collect cash from the insurance company.  Thus, the cash surrender value is the floor value.

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