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For one reason or another, sometimes people find themselves with life insurance policies they no longer want or need. The premium may be too high, or the policy may simply be underperforming, or the need for the policy just isn’t there anymore. Regardless, these policies can become a burden when other, more lucrative investment opportunities present themselves. For this reason, many people simply surrender their policies when the need arises, but what does that mean, and are there other options?
First, there’s the surrender option. By surrendering your policy, you’re agreeing to take the cash surrender value that the insurance company has assigned to your policy, and in return, forgoing the death benefit. Whole and universal policies accrue cash value, making them the most likely option for surrender. Depending on the type and age of the policy, they may have accrued a significant amount of cash value—or not very much at all. Surrendering a policy rids of you the burden of a monthly premium and potentially nets a fair amount of money for other investments or necessities.
If you have a term policy, however, it won’t have any cash surrender value. Surrendering a term policy essentially means removing the monthly premium from the budget, but unfortunately, not much else.
There are two caveats to surrendering a policy, however. First, if your policy isn’t very old, you may incur surrender fees which will lessen the amount of cash you receive. Second, the gain on your policy—however much it may be—will be taxed as income. Death benefits are tax-exempt, but the cash you receive from surrendering is taxable. Consult your tax professional before making any decisions.
Another option that few people consider is a life settlement. A life settlement is the sale of a person’s life insurance policy to a third-party investor. In a life settlement, the policy’s owner transfers the ownership of that policy in exchange for an immediate cash payment from the buyer. Candidates for life settlements are typically 70 or older, with a life insurance policy that has a death benefit of more than $100,000.
Depending on the age and type of policy, a life settlement may be worth 5-8 times the cash surrender value. Universal and whole life policies make great options for life settlements. Even term policies, if they have a rider that can convert them to a universal life policy, may be an option to sell as a life settlement.
Life settlements may not work for everyone, but they’re a valuable option that many people don’t consider. If you or a client has a life insurance policy you’re planning to surrender, consider a life settlement. It might provide you with a valuable alternative. You can see if it’s a good fit by using our qualification calculator.
I would be happy to answer any questions you might have about this, or any other life settlement topic. I can be reached at 888-849-0887 or firstname.lastname@example.org.