At some point, you might consider surrendering or selling your life insurance policy that you no longer need or want. But what does surrendering a policy mean, and how do you sell one?
When a life insurance policy is surrendered, you cancel the policy and then you are paid the surrender value, which is the cash value excluding any surrender fees. This means if you’re canceling a life insurance policy you won’t receive the full benefit, but rather a certain percentage of the value. With all of the life insurance policy cancellation rules, it might be hard to tell the amount you’ll get when you surrender a policy.
It’s important to note that not everyone qualifies for selling a life insurance policy. In order to qualify, you typically need to be at least 65 years of age and meet other criteria. Let’s look at surrendering your life insurance, how you can determine what you’ll get, and how you can know for sure if you are eligible.
What Happens If I Surrender My Life Insurance Policy?
Although the results of surrendering a policy might vary depending on the type, by doing so you agree to accept the cash surrender value that the insurance provider has given to your policy. Cash surrender value is defined as the amount in your policy’s cash value account excluding any surrender charges. When you surrender your policy, your life insurance is essentially canceled right away, and your beneficiaries will no longer be entitled to the death benefit when you pass away. Your insurance provider will stop providing coverage and issue a check for the cash surrender value of your policy. It’s important to note that there is no cash surrender value of term life insurance because term life does not have a cash value component, there is no money to be recovered.
It’s important to note that the amount of money you receive will be reduced by surrender costs if your policy isn’t very old, because there hasn’t been enough money put in. Not only that, but the cash surrender value you receive will be taxed as income if the amount is above the premiums you put in. Although this is not the case with death benefits, which are not taxable, in contrast to the money you get in exchange for surrendering. Before you make the decision to surrender your policy, you should speak with a qualified financial advisor or tax professional to help you understand these ramifications.
What is the difference between cancellation and surrender of an insurance policy? Basically, when you surrender a life insurance policy, the insurance is canceled. That means cancellation is an automatic outcome of surrendering your life insurance policy, rather than a different piece of the puzzle.
Do You Get Money Back When You Surrender a Life Insurance Policy?
Yes! If you do not have term life insurance, you get the cash surrender value of your life insurance policy when you surrender instead of the death benefit. As mentioned above, the cash surrender amount is lower than the death benefit, which means you will receive less than the amount your beneficiaries would receive after your passing.
However, there are other methods of receiving cash in the event you no longer need or want life insurance. You can sell your life insurance policy (also called a life settlement) to a third party, like those brokered by Life Settlement Advisors, who will pay you more than 4-7 times the surrender cash value and take over your premium payments for you. That relieves you of the burden of making payments on life insurance and puts more money in your pocket to use for unexpected expenses, investments, or setting your family up for success in the event of your passing—among other things. Check to see if you qualify with Life Settlement Advisors’s calculator.
How Do I Determine the Cash Value of My Life Insurance Policy?
Add together all of the premium payments made to the insurance policy to determine the cash surrender value and then subtract the costs that the insurance company will charge as a result of the policy’s surrender. That formula will help you not only determine the value of your policy, but also how much you would receive if you surrendered it.
It’s also important to consider whether the life insurance you hold is guaranteed or non-guaranteed:
- A non-guaranteed policy has a death benefit paid out when you pass, but it also has an investing component that is not found in other types of policies. This insurance accounts for your paid premiums as well as the value of any investments and bonuses related to the insurance policy. If you’ve had the insurance for a while, this sum could exceed the guaranteed surrender value. However, your non-guaranteed life insurance policy’s cash value is not a death benefit and will not be paid to your beneficiaries. The insurance company keeps the cash value of your policy if you pass away before using it.
- A guaranteed insurance policy is one in which the insurer, in exchange for a fixed premium payment, takes on all the risk and contractually guarantees the death benefit. Once you hold the policy for three years, you have access to 30% of the premiums you’ve paid. Years four through seven bring that up to 50%. And after seven years, the insurance company needs to calculate your rate. Because you pay premiums, the insurance policy gains value over time, which leads to higher guaranteed surrender values.
If You Cash In an Insurance Policy, Is it Taxable?
Yes, unfortunately, if you surrender your insurance policy, it is considered taxable income. So you will have a surrender cost as well as having to pay taxes on profits. With life insurance settlements, like those offered by Life Settlement Advisors, you would not only have the opportunity to get paid more in return for your policy, but only your profits are taxable.
The profit of your life settlement is defined under the Tax Cuts and Jobs Act of 2017 (TCJA) as the difference between the premiums you paid and the cash payout you collected from the sale. Depending on the cost of your insurance policy compared to the amount received (sale price) when you sell it, part of that profit is taxed as regular income and some is taxed as capital gains. Remember to speak with a financial advisor if you’re considering surrendering your policy.
Should I Surrender My Life Insurance Policy?
Surrendering your life insurance policy can be a good option for those who no longer need or want their coverage, but selling your policy in a life settlement can net you more cash than the surrender value, assuming you qualify. Life insurance settlements offered from Life Settlement Advisors can get you money now, when you need it the most, with confidence and assurance.
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.
I am always happy to answer any and all questions about these life-transforming transactions.