What Does It Mean when a Life Insurance Policy is Surrendered?

Did you know you can sell all or a portion of a life insurance policy, even term insurance?

(3 minute read)

Do you have a life insurance policy that you’re not sure what to do with? Perhaps your children have graduated from college and have good jobs. Maybe your marriage has ended and the need for the life insurance policy no longer exists. Or simply, you sold your business and no longer need the life insurance policy that the business owns.

No matter your life changes, the fact is that sometimes life insurance policies aren’t needed any longer.  Many people decide to cash in life insurance while still alive in order to rid themselves of unwanted or unneeded policies. Let’s take a look at surrendering life insurance policies and all the ins and outs of this method of dealing with your unwanted policy. 

What does it mean when a policy is surrendered?

When you surrender your life insurance policy, you are essentially canceling it. Some types of policies will allow you to receive a sum of money upon surrendering based on the amount of cash value that has accumulated. You can surrender your policy whenever you decide to, and doing so does not affect your ability to procure a new life insurance policy in the future.

You may be wondering, “what happens when you surrender a whole life policy?” Whole life policies have a cash value that is calculated based on a formula that your insurance company has. You will need to contact your life insurance company to determine how much you will receive when you surrender your policy. Each type of life insurance policy will have a different cash surrender value, and it is also important to note that some policies, like term life insurance, do not have any cash surrender value. 

What is the average cash surrender value of a life insurance policy?

The average surrender value of a life insurance policy is $460 for every $100,000 in value

The cash surrender value is the savings component of life insurance policies, where money accrues according to the type of policy you hold. The cash value will depend on the age of the account and how much money has accumulated. There may be surrender fees, although again, depending on how long you have held the account, these may be minimal. In general, you will receive more money and have to pay fewer fees if you have held the policy for a longer amount of time.

What are the tax consequences of surrendering a life insurance policy?

In general, most cash value surrender sums are treated as income and taxed as such. This is taxed at your normal income rate. However, this only applies to the amount of money that is over and above what you have paid in premiums. 

For example, if you paid $275 per month into a $200,000 whole life insurance policy for 30 months, you could expect the first $8,250 of cash value to be tax-free. With the average surrender value being so low, you will notice that for a $200,000 policy, you will most likely receive around $920 — nowhere close to being taxed. 

Any dividends, interest, or capital gains that were paid in the cash value are counted as taxable income. Consult a tax professional in order to understand all the tax consequences of surrendering a life insurance policy.

Is there any loss on the surrender of life insurance policy?

Yes, there is. Depending on the age of your policy, you may lose some of your surrender value to fees and charges, and no matter what, your policy will be canceled and your beneficiaries will no longer receive the death benefit. It’s also worthwhile to note that investment you have made into premiums. 

Another option to consider is a life settlement. Instead of canceling your policy, you can treat it like any other asset you own and sell it into the secondary market, no different than your home or a car. You will receive a lump sum cash payout that is typically four to eight times its cash surrender value

We provide a life insurance settlement calculator to give our clients a clear, immediate picture of the highest possible value they could get from a life settlement. Qualifying for a life settlement is based on age, health status, how long you’ve had the policy, annual premium paid, its benefit value, and other factors. But if you are approved, a life settlement can bring far greater return of your money on the same investment than any surrender value.

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.

Leo LaGrotte
Life Settlement Advisors

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors
Leo LaGrotte
At Life Settlement Advisors, we strive to be a voice of confidence and assurance for our clients. Our goal is to educate you about the life settlement process so you can make an educated decision about whether it is right for you.

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