Should I cancel my life insurance? The answer to this question depends on many factors including your overall financial stability, the number of dependents you have, your specific retirement goals, and so much more. But, if the stars align, canceling a life insurance policy enables you to experience greater financial freedom in retirement. To help you find the best solution for your unique situation, Life Settlement Advisors created this blog.
Alternatives to Surrendering Your Policy
When people ask “How much will I receive if I surrender my life Insurance policy?” They are often disappointed with the answer. Although the surrender process is straightforward, it won’t give you the best payout. If you want the best value for your policy, life settlements are the better option. Selling your policy always gives you a greater profit than surrendering. Although the precise cash amount of a life settlement varies, they most often provide four to seven times more than a surrender payout. The only caveat is you must meet certain requirements to successfully pursue a life settlement.
Why Would Someone Surrender a Life Insurance Policy?
There are many compelling reasons for someone to get rid of their life insurance. Here are three of the most common ones.
- You Have Little Debt and No Dependents: If no one depends on you financially and your debts are mostly paid off, you don’t need your life insurance. In this case, you can cancel your policy and put that money towards something more worthwhile.
- Your Monthly Premiums Are Too Costly: Expensive monthly premiums are the number one reason for the surrender of a policy. When living on a fixed income, all expenses must be evaluated carefully, and canceling an unwanted life insurance policy is a painless way to increase your monthly cash flow.
- You Need to Pay Off Medical Debt: According to the National Council on Aging, 84% of people aged 65+ are coping with at least one chronic condition, and often more as they age. The same report states that out-of-pocket medical expenditures in the five years before an individual’s passing were over $38,000, leaving one in four seniors approaching bankruptcy. If you are saddled with extensive medical debt, getting rid of your life insurance policy is a simple way to ease your burdens.
Do You Get Money Back When You Surrender a Life Insurance Policy?
In the surrender process, you work directly with your insurance provider to end your policy, stop your premium payments, and receive your surrender value. The surrender value of a policy is based on the number of premiums paid into your account plus interest and investment gains. Additionally, the cash surrender value of life insurance is taxable, and you are responsible for paying taxes on the portion of your payout that is above the cost basis. Lastly, you may have the ability to surrender a portion of your policy, depending on your insurance provider and policy type.
What Is the Difference Between the Cancellation and Surrender of an Insurance Policy?
Surrendering is just one method of canceling your policy, but it is not the only method. You can also elect to sell your policy to a life settlement company. In the life settlement process, the buyer pays your monthly premium payments until your death. In turn, they receive the death benefit when you pass away. Whole life, convertible term, second-to-die, and universal policies can all be sold to the secondary market. So, why would you choose to sell your life insurance policy instead of surrendering it? We’ll get to that in the next section.
How Do I Qualify for a Life Settlement?
To sell your life insurance policy, you must meet the following requirements:
- Life Expectancy: You must have a life expectancy of 15 years or less. Life expectancy is calculated by evaluating existing health issues, medical records, and age.
- Age: Life settlements are most often provided to people aged 65 years or older. In some unique circumstances, a younger person can qualify.
- Premium Amount: If your annual premium is 7% of the death benefit or higher, then your policy will be less desirable to buyers.
- Policy Type: Your policy must also be at least two years old to qualify.
- Death Benefit Amount: Your death benefit must be $100,000 or more.