Life changes as the years roll on, and so do your financial needs. Maybe your mortgage is paid off, your kids are financially independent, or the cost of life insurance premiums is straining your budget. If your policy no longer fits your goals, you may wonder: Should I surrender my life insurance policy for its cash value?
Below, we walk you through how surrendering works, what you might receive in cash and when selling your policy through a life settlement could offer a better outcome.
WHAT DOES SURRENDERING A LIFE INSURANCE POLICY MEAN?
To surrender a life insurance policy for cash means canceling it in exchange for its cash surrender value. This value is the amount of money your insurer will pay you based on the policy’s accumulated cash value, minus fees and outstanding obligations.
Once surrendered:
- Your coverage ends immediately.
- You stop paying premiums.
- Your beneficiaries no longer receive a death benefit.
Only permanent policies, such as whole or universal life, build cash value and offer a surrender option. Term life insurance doesn’t qualify unless it’s convertible, as there is no cash value. Generally, when you surrender a term policy, your coverage ends; there is no death benefit and no cash payout to your beneficiaries.
WHAT DOES LIFE INSURANCE CASH SURRENDER VALUE MEAN?
Cash value is the savings-like component of a permanent life insurance policy. Each time you pay your premium, a portion goes into this account, where it may grow over time through fixed interest (whole life) or market performance (universal or variable life).
Your cash value balance can be:
- Borrowed against
- Withdrawn
- Used to pay premiums
- Surrendered for cash
However, taking cash out typically reduces your policy’s death benefit. Any cash value left in your policy when you die goes to the insurer, not your beneficiaries.
WHEN IS THE BEST TIME TO SURRENDER A LIFE INSURANCE POLICY?
It’s best to surrender a policy for cash value when you’re past your waiting period and any surrender fee charges. This will get you the highest return. A surrender fee, also called a surrender charge, is deducted from your cash value if you cancel your policy too early. These fees are highest in the first several years of a whole life or universal life policy. The cost can be 100% of the cash value in the first year, although your policy won’t have built much cash value in that time anyway. The surrender fee usually decreases over time, sometimes disappearing completely after 10 to 15 years.
Policies also typically have a waiting period before you can surrender them, lasting from a few years to as many as 15 years, depending on your insurer.
CASH VALUE VS. SURRENDER VALUE: WHAT’S THE DIFFERENCE?
Knowing the difference between cash value and cash surrender value can help you understand what your policy is worth if you cancel it.
Cash Value
As previously mentioned, a policy’s cash value is the money that accumulates in a permanent life insurance policy over time. Factors determining cash value include the sum of the premiums you have paid, the age of the policy, investment choices and the interest rates on the account.
Cash Surrender Value
Cash surrender value is the amount of cash you will receive if you surrender the policy. To get this figure, subtract any outstanding policy loans, interest, unpaid premiums and surrender fees from the cash value.
To illustrate:
If your policy has built up $25,000 in cash value, but you owe $3,000 in loans and a $1,000 surrender fee, your surrender value would be $21,000.
WHY WOULD YOU SURRENDER YOUR LIFE INSURANCE POLICY FOR CASH VALUE?
Surrendering a life insurance policy is a personal decision. Here are common scenarios where it makes sense for some people:
- Your premiums have become a financial burden. Retirement, job loss or fixed income can make premium payments unsustainable. If the payments are getting too hard to manage, surrendering the policy can take that weight off your shoulders.
- You need access to quick cash. If you are dealing with medical expenses, paying off debt or supporting family members, your policy’s cash value could help you avoid borrowing money or dipping into savings.
- Your life plans have changed. If the people you once bought the policy for, like your spouse or children, no longer need the support, you may not want to keep your coverage.
- You found a better coverage option. Newer policies may offer better rates or features, especially if your health has improved or the market has shifted.
PROS AND CONS OF SURRENDERING YOUR POLICY
Before you surrender a life insurance policy for cash, consider these advantages and disadvantages:
Pros:
- Immediate access to cash: You get a lump sum payout that you can use however you want.
- No more premiums: Once you surrender your policy, you do not pay another dime.
- Simple process: You work directly with your insurer to cancel the policy.
Cons:
- No more coverage: There is no death benefit for your beneficiaries after you pass away.
- Potential tax liability: You may have to pay taxes on any cash you receive over what you’ve paid into the policy in premiums.
- Lower payout than a life settlement: If your policy qualifies for a life settlement option, you might leave considerable money on the table.
HOW DO YOU SURRENDER YOUR LIFE INSURANCE POLICY?
To surrender your policy for cash value, you’ll need to gather a few policy documents (contract and amendments, payment receipts) and notify your insurer. Insurers each have their own cancellation process, but you can expect to fill out policy termination and surrender forms. Once the insurer receives your paperwork, processing the policy surrender can take another two to six weeks.
ALTERNATIVES TO SURRENDERING A LIFE INSURANCE POLICY
Policy surrender isn’t your only option when you no longer need your life insurance. The following alternatives could give you more value than a straight surrender, depending on your policy and health.
Life Settlement
A life settlement lets you sell your life insurance policy to a third party for a cash payment — often four to seven times more than the surrender value (but still less than the death benefit). The buyer takes over the premiums and receives the death benefit when you pass.
This option works best for people:
- Over 65 years old
- With a change in health since the policy was issued
- With a policy death benefit of $100,000+
If you no longer need the coverage, a life settlement might be a better option than a surrender.
Viatical Settlement
A viatical settlement is a special type of life settlement for individuals with terminal or chronic illness and a shortened life expectancy, such as two years or less. Since life settlement payouts are partly based on life expectancy estimates, offers are usually higher than standard life settlements.
Both options may allow you to sell your life insurance for a better return than your insurer would pay if you surrendered the policy directly. But to qualify, you must have a permanent or convertible term policy and act before the policy expires.
HOW MUCH CAN YOU GET WHEN SELLING YOUR LIFE INSURANCE?
Generally, life settlement payouts range between 10% and 30% of the policy’s death benefit. So, while surrendering a policy might give you a few thousand dollars, a life settlement pays an average of four to seven times more — sometimes even more.
For instance, someone with a $500,000 policy might get $10,000 in cash surrender — or $40,000 to $70,000 through a life settlement.
Factors like your life expectancy, premium costs and current market conditions play significant roles in determining the value of a life settlement payout.
IS IT WORTH IT TO SURRENDER A LIFE INSURANCE POLICY FOR CASH VALUE?
Surrendering your life insurance policy can provide quick access to cash and eliminate ongoing premiums, but it’s not always your most valuable option. Before surrendering, consider whether a life settlement could offer a higher return. You may be able to turn your policy into a more meaningful financial resource for today.
Life Settlement Advisors can help you explore all your options so you can make the best choice for your future. Contact us at 1.888.849.0887 or visit us online to request your free policy review.
