What happens to the cash value of a whole life policy when it is surrendered for a reduced paid-up policy?

When a whole life insurance policy is surrendered for a reduced paid-up policy, the cash value that has accumulated in the original policy is converted into a new policy that has a lower face amount but retains the benefits of permanent coverage. The cash value is used as a premium payment for this reduced paid-up policy.

This means that while the coverage is reduced, the cash value does not vanish or decrease when the policy is converted. Instead, it is applied towards the new policy, and the policyholder continues to benefit from the cash value, even though it is now associated with a different, lower-face-value policy. Additionally, the reduced paid-up policy will still accumulate some cash value over time, although at a potentially slower rate compared to the original whole life policy.

Thus, when surrendering for a reduced paid-up policy, the cash value effectively continues to generate value for the policyholder, solidifying the correctness of the understanding that the cash value continues to increase, albeit under different terms.