If your life insurance policy is no longer needed or suddenly unaffordable, you’re not alone. Elder Index reports that more than 19 million American seniors are struggling financially. Many of these older adults are comparing a life settlement vs. surrender options to find the most economically prudent solution.
When looking at the advantages of selling a life insurance policy vs. surrendering it, you’ll want to compare the most important elements, such as payout, eligibility, tax implications, coverage impacts, and the process. Life Settlement Advisors offers this guide as a comprehensive comparison of a life settlement vs. cash surrender, so you can confidently make a decision according to your situation.
The Difference Between Surrendering and Selling Your Policy
To start the life settlement vs. cash surrender comparison, let’s define the two options. Both permanently end premium payments and future policy benefits.
- Surrendering your policy: This action requires a voluntary cancellation of the policy. The insurance company will determine the cash surrender value, minus surrender charges, and pay you that amount directly.
- Life settlement: This action involves a life settlement broker like Life Settlement Advisors shopping your policy on the secondary market for a substantially greater payout.
How Surrendering Works
When surrendering a life insurance policy, you request from your insurer to permanently cancel your policy in exchange for the cash surrender value, minus the surrender charges and outstanding loans. Your coverage ends permanently.
A big difference between a life insurance surrender vs. settlement is that with surrendering, the insurer will process the request and usually pay you out within a few weeks. It can be faster but result in a much smaller payout.
How a Life Settlement Works
With a life settlement, you’ll sell the policy to a third-party buyer through the secondary market with the help of a life settlement broker or a provider. The buyer of your policy will take over the premium payments and receive the death benefits.
The policyholder receives a lump sum payment that typically exceeds the cash surrender value. Life Settlement Advisors submits the policy to multiple institutional buyers to generate competitive offers. Unlike many other brokers, they’ll keep you updated at every step of the process.
Comparing Life Settlement vs Surrender
Whether selling life insurance is better than surrendering depends on different factors. The following pros and cons of a life settlement vs. surrender life insurance can help you choose the best option for your situation.
Payout Amount |
Eligibility Requirements |
Tax Treatment |
Impact on Coverage |
Process Timeline |
Who It Works Best For |
|
Life Settlement |
Typically the highest payout available. | Older adults only who have larger-value policies. Both permanent and term policies are possibly eligible. Health status is assessed through underwriting. | Taxed in three tiers and best handled by a tax professional. | Permanently end the policy and benefit. | An average of 90 days, with weekly updates from Life Settlement Advisors. | Older, qualifying adults who can use extra income to cover other expenses. |
Surrendering Your Policy |
Determined by the insurer and impacted by surrender charges and loan payback. | No age, health, or value requirements, although term policies usually do not qualify. | Simpler tax requirements and lower tax burdens due to smaller payouts. | Permanently end the policy and benefit, and the value cannot be sold on the secondary market. | Usually a few weeks. | Adults younger than 65 with term insurance, or those who need cash fast. |
Payout Amount
Why sell life insurance instead of surrendering it? If the payout is your bottom line, the answer is clear. A life settlement typically returns significantly more than the cash surrender value. This process leverages the competitive bidding power of the secondary market.
Life Settlement Advisors works to maximize how much your policy could be worth through simultaneous submissions to multiple institutional buyers.
Surrendering, meanwhile, is limited to the policy’s cash surrender value as set by the insurer. This amount also decreases with surrender charges and outstanding loan balances.
Eligibility Requirements
The life settlement vs. policy surrender debate also hinges on differing eligibility requirements.
A life settlement is available to policyholders who are typically 65 or older and have a policy face value of at least $100,000. Underwriters will assess their health status. Both whole life insurance and term life insurance qualify, although permanent policies are most common.
All permanent policyholders, regardless of age or health, qualify to surrender their policy. However, term policies do not qualify unless they have a “return of premium” rider.
Tax Treatment
Another notable difference in the life insurance surrender vs. sell policy question is the tax liability. The tax burden depends on the gain above premiums paid.
Life settlement proceeds are taxed in three tiers:
- 1. The return of cost basis, or what you’ve paid already in premiums, is tax-free.
- 2. The gain up to cash surrender value is taxed as ordinary income.
- 3. The gain above cash surrender value may be taxed as capital gains.
This is best handled by a tax professional and is very different than how cash surrender value is taxed.
With a surrender, the gain above total premiums paid is taxed as ordinary income. The insurer reports this on IRS Form 1099-R. This simpler tax structure is based on the typically smaller taxable amount and lower payout.
Impact on Coverage
Here’s where these options are similar. Both selling a life insurance policy and surrendering it will permanently end your policy, premiums, and benefits. With the life settlement option, the policy transfers to the buyer. With a policy surrender, the policy is canceled, and you can never recover the secondary market value.
Process Timeline
With the process timeline, patience pays. A life settlement is usually more complex and takes longer than surrender, approximately 90 days from submission to payout. This is due to the competitive bidding process, policy review, escrow, and medical underwriting. Life Settlement Advisors will provide weekly updates, so you won’t have to worry about the status or progress.
Surrendering happens faster. It takes a few weeks after the surrender request is submitted to the insurer. It demands less documentation, but the payout is lower as a result.
When to Sell or Surrender Your Life Insurance
Now that you have the information to compare a life insurance settlement vs. surrender for senior care, you may already know which is best for you. The most important factors for your decision are whether you are eligible for a life settlement, which offers the best benefits for your individual situation, and whether there are potential drawbacks you can foresee regarding a policy transfer.
When a Life Settlement Makes More Sense
It’s smart to sell your life insurance policy if:
- The policyholder is 65 or older.
- You have a qualifying permanent policy.
- The premiums have become unaffordable.
- The coverage is no longer needed.
- The cash surrender value is low, especially when compared to the face value.
- Immediate liquidity is needed for retirement, healthcare, or long-term care costs.
As you consider a life settlement vs. surrender, you can always call Life Settlement Advisors for a low-pressure assessment of your individual policy. This is the easiest way to determine if a life settlement is the right fit for you.
Want to Sell? LSA Can Help You Get the Best Offer
A policy surrender makes sense if your policy lacks a conversion rider, is below minimum face value, or doesn’t qualify for settlement in another way. If you can’t wait for a payout and are willing to take a smaller amount, then surrender may be a better option. Or, if your cash surrender value is not far from a life settlement quote, surrendering may be a better alternative to life settlement.
Life Settlement Advisors can check your eligibility. Get in touch by phone or through the website with Life Settlement Advisors today to take the first step toward converting your policy into cash.
