When is the Right Time to Surrender a Life Insurance Policy?

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

(3 minute read)

Surrendering a life insurance policy means cancelling the policy, and potentially receiving a payout as a result. The question of how much you will receive from surrendering life insurance depends on how long you’ve had the policy, and how much the policy is worth. Here’s what you need to know about timing a life insurance surrender, and better options like a life settlement that could get you more return on the investment.

Life Insurance Surrender Investment Returns and Fees

To break even on your life insurance surrender, meaning you get back  a large portion of the premiums you have paid into the policy, usually requires you have held the policy for at least  ten years and sometimes longer. Many policies, especially whole life policies, will never break even through a life insurance surrender. This is true due to the inflation that takes place over the decades someone keeps the policy, as well as the way the cash portion of policies are invested. There’s also the consideration that the insurance company takes between 10-30% of the surrender value in fees. But if you haven’t held your life insurance policy for at least  ten years, you are unlikely to make any returns on a surrender.

How Much Does a Life Insurance Surrender Pay on Average?

For every $100,000 in a policy’s coverage an average of $460 is received in surrender benefits. This means a million-dollar policy would be surrendered for an average of $4,600. After years of premium payments, even double or triple this average wouldn’t represent an adequate return on the investment for many clients. Yet, after 30 years, as many as 77% of policy holders have chosen to accept the short end of the stick to get out of life insurance premium payments for policies they no longer want or need. 

What is the Difference Between Life Insurance Surrender and a Life Settlement?

Only permanent life insurance such as whole life insurance and universal life insurance can be surrendered for cash value. In contrast, all types of insurance can be sold in a life settlement, even term insurance. The one criteria insurance must meet for a life settlement is that a policy must be worth at least $100,000 to qualify. Typically, policy holders age 65 and up have an easier time selling their policy in a life settlement.

When someone engages in a life settlement transaction, the policy is not cancelled. Instead, it is purchased by an investor who takes over paying the premiums and ultimately receives the death benefit when the policy holder passes on. Unlike a life insurance surrender where the whole policy must be cancelled, in a life settlement, the policy holder can keep a portion of their coverage and sell the rest.

All these benefits haven’t even touched on the greater returns you can get by choosing a life settlement versus a surrender. On average, a life settlement pays out 20% of the policy’s face value. That means a million dollar policy would sell in a life settlement for $200,000—almost  20x greater than the average the same policy would receive in a surrender.

Based on age, some individuals might find it necessary to surrender a life insurance policy if they want the policy to be cancelled. We recommend speaking with a financial professional to calculate how long you should keep the policy to get the maximum return from a surrender.

But the unfair payouts received from a life insurance surrender represent why we at Life Settlement Advisors are so passionate about helping educate the world about life settlements. These transactions represent a simple way for policy holders and their trusted advisors to get greater returns from the same assets, with no difference in the amount of work required for anyone involved.

To learn more about life settlements and see if you might qualify, visit our life settlement calculator. I am also happy to answer any and all questions about these life-transforming transactions.

Leo LaGrotte
Life Settlement Advisors
llagrotte@lsa-llc.com
1-888-849-0887

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