When it is time to cash in your life insurance policy, you have two main options: surrendering the policy for its cash value or selling it through a life settlement. Both can help you access your policy’s financial value, but they work differently and have unique pros, cons and outcomes.
So, what is the difference between a life settlement and a cash surrender? This guide will explain how each option works, weigh its pros and cons, and help you decide which is better suited to your financial goals.
WHAT IS A CASH SURRENDER IN LIFE INSURANCE?
A cash surrender allows you to terminate your life insurance policy and receive a payout from your insurer based on the policy’s cash surrender value. This is a popular option when you no longer need the policy or need quick access to funds. However, it is important to understand how this payout is calculated and what limitations might apply.
How Is the Cash Surrender Value of a Life Insurance Policy Determined?
The cash surrender value of a life insurance policy is based on the premiums you’ve paid, how much the policy has grown and any loans or withdrawals taken against it. Your insurer may also deduct fees, penalties and outstanding debt, which could reduce the final amount you receive.
Pros of a Cash Surrender
- Simplicity: You deal directly with your insurer, making it a relatively straightforward process.
- Fast access to money: If you need cash urgently, this option usually delivers funds within a few weeks.
- No third parties: You need not involve brokers or external buyers.
Cons of a cash surrender
- Lower payout: You typically get less money than what the policy might be worth on the secondary market.
- Termination of coverage: Surrendering a life insurance policy results in the loss of benefits and cancels your policy permanently — you cannot reinstate it later.
- Tax consequences: If your payout exceeds the premiums you have paid, the difference is considered taxable income, which could reduce your net payout.
Surrendering a life insurance policy for its cash value may work well for those who no longer need their policy and seek a quick, uncomplicated way to convert it into cash. However, those looking to maximize their policy’s value should consider another option: a life settlement.
WHAT IS A LIFE SETTLEMENT?
A life settlement allows you to sell your life insurance policy to a third-party buyer for a lump sum payment. This option often provides a much higher payout than the cash surrender value of a life insurance policy, especially for those that meet certain criteria.
How Does a Life Settlement Work?
In a life settlement, you sell your life insurance policy to a buyer, who takes over your policy, pays the future premiums and eventually collects the death benefit. This option is typically available to policyholders aged 65 or older or those with serious health conditions.
How Is the Value of a Life Settlement Determined?
The value of a life settlement depends on several factors:
- Policy type and size: Larger policies with higher face values typically yield higher settlement offers.
- Your health: Buyers often pay more for policies held by individuals with shorter life expectancies, since they will receive the death benefit sooner.
- Premiums: Policies with lower ongoing premiums are more attractive to buyers as they are cheaper to maintain.
A life settlement broker plays a crucial role in maximizing the value of a life settlement by connecting the policyholder with multiple buyers and creating a competitive bidding process that increases the payout.
Pros of a Life Settlement
- Higher payouts: You could receive three to four times the amount of a cash surrender value.
- Competitive offers: You can work with a life settlement broker, who can offer your policy to multiple buyers, ensuring you get the best price possible.
- Repurposes unneeded policies: A life settlement allows you to convert a policy you no longer need or cannot afford into cash.
Cons of a Life Settlement
- Slower process: The life settlement process can take weeks or months due to the need for underwriting, appraising the policy and negotiating the sale.
- Privacy concerns: Buyers typically need access to your medical and personal info to assess the value of your policy.
- Costs: Broker fees and other transaction costs can reduce your final payout.
LIFE SETTLEMENTS VS. CASH SURRENDERS: WHICH ONE SHOULD YOU CHOOSE?
Life settlement or cash surrender? This ultimately depends on your circumstances, financial needs and long-term goals. Here are some guidelines to help you make an informed and empowered decision:
A cash surrender may make sense when:
- You need fast cash: If your priority is immediate access to funds, a cash surrender gets money in your hands quickly.
- The policy is not worth much: If your policy has a low market value, a cash surrender might be more straightforward.
- You want a simple process: A cash surrender offers a hassle-free solution for those who wish to avoid a lengthy process or third-party involvement.
A life settlement may be a better choice when:
- You want the best payout: A life settlement often provides the most value for your policy.
- You no longer need the coverage: If your insurance needs or financial priorities have changed, selling your policy can help you address new goals, such as funding your retirement or paying for healthcare.
- Your policy qualifies as high-value: Policies with large face values or those owned by individuals over 65 with declining health typically attract the highest offers on the secondary market.
THE BOTTOM LINE: MAXIMIZE YOUR POLICY’S VALUE
Choosing between a life settlement and a cash surrender is a big financial decision. Both allow you to access the financial value of your policy, but they come with different implications, benefits and potential drawbacks.
While a cash surrender offers speed and simplicity, it often means leaving money on the table. On the other hand, a life settlement requires more time and effort but maximizes the value of your policy by exposing it to a competitive market.
At Life Settlement Advisors, we specialize in guiding clients through this important decision-making process. Whether you are considering surrendering your life insurance for its cash value or exploring a life settlement, our experienced team can help you evaluate your options and secure the best possible outcome.
Ready to maximize the value of your life insurance policy? Contact Life Settlement Advisors today to learn more about how we can assist you in making the most of your life insurance assets.
