You may have had your life insurance policy for a while. Perhaps you took it out to protect your family, business or future, but those things have changed. Maybe you have paid off your house. Maybe your kids are grown. Or perhaps the premiums are just too much.
Now you are considering your options and wondering: Should I surrender my life insurance policy and take the cash value? It’s a valid question, and the answer depends on your situation.
This article will explain how surrendering a life insurance policy works, what the cash surrender value means, and when it might make more sense to sell your life insurance policy for a better return.
WHAT IS LIFE INSURANCE POLICY SURRENDER?
Surrendering a life insurance policy means canceling it and asking your insurance company to give you any built-up cash value. This option is available only with permanent policies such as whole or universal life insurance.
Term life insurance usually does not offer any cash if you cancel your policy. When you surrender a term policy, your coverage simply ends; there is no death benefit payable to your beneficiaries and no cash payout.
UNDERSTANDING THE CASH VALUE OF A LIFE INSURANCE POLICY
When people refer to the “cash value” in a life insurance policy, they mean the monetary value that has built up over time. When you pay premiums into a whole or universal life policy, part of that money goes toward building cash value. Over time, that cash value grows like a savings account inside your policy.
Cash Value vs. Surrender Value
Knowing the difference between cash value and cash surrender value can help you understand what your policy is really worth if you cancel it.
Cash Value
As mentioned above, a policy’s cash value is that which accumulates in a permanent life insurance policy over time. Factors determining cash value include the sum of the premiums you have paid, the age of the policy, investment choices and the size of the death benefit.
Surrender Fee
A surrender fee, also called a surrender charge, comes out of your cash value if you cancel your policy too early. These fees are most common in the first several years of a whole life or universal life policy. Over time, the fee usually goes down, sometimes disappearing completely after 10 to 15 years.
Cash Surrender Value
This is the amount of cash you will receive if you surrender the policy after subtracting any outstanding policy loans or interest, unpaid premiums and surrender fees from the cash value.
To illustrate:
If your policy has built up $25,000 in cash value, but you owe $3,000 in loans and a $1,000 surrender fee, your surrender value would be $21,000.
WHY WOULD YOU SURRENDER YOUR LIFE INSURANCE POLICY?
There are a few reasons people decide to surrender their life insurance policy. For instance, you might consider selling life insurance with a surrender value if:
- Your premiums have become a financial burden. Maybe your income changed after retirement or a job loss. If the payments are getting too hard to manage, surrendering the policy can take that weight off your shoulders.
- You need access to quick cash. If you are dealing with medical expenses, paying off debt or supporting family members, your policy’s cash value could help you avoid borrowing money or dipping into savings.
- Your life plans have changed. If the people you once bought the policy for, like your spouse or children, no longer need the support, you may no longer require coverage.
PROS AND CONS OF SURRENDERING YOUR POLICY
Before you surrender your life insurance for cash, it’s important to consider the advantages and disadvantages and weigh your alternatives.
Pros:
- Immediate access to cash. You get a lump sum payout that you can use however you want.
- No more premiums. Once you surrender your policy, you do not pay another dime.
- Simple process. You work directly with your insurer to cancel the policy.
Cons:
- You lose your coverage. There is no death benefit for your beneficiaries.
- You might pay taxes. Any cash over what you have paid in premiums may be taxable.
- There might be better alternatives. If your policy qualifies for a life settlement option, you might leave a considerable amount of money on the table.
ALTERNATIVES TO SURRENDERING A LIFE INSURANCE POLICY
Policy surrender isn’t your only option when you no longer need your life insurance. Depending on your policy and health, the following alternatives could give you more value than a straight surrender.
Life Settlement
A life settlement lets you sell your life insurance policy to a third party for a cash payment. You will usually get more than the surrender value, though less than the death benefit. The buyer takes over the premiums and eventually receives the death benefit.
This option works best for people over 65 or those with a serious health condition. If your policy’s death benefit is at least $100,000 and you no longer need the coverage, a life settlement might be a better option than a surrender.
Viatical Settlement
A viatical settlement is similar to a life settlement but is specifically for people with a life-threatening illness and a shorter life expectancy. Comparing life settlements vs. viatical settlements, the payout is often higher for the latter because the buyer expects to collect on the policy sooner.
Both options can allow you to sell your life insurance for a better return than your insurer would pay if you surrendered the policy directly. But to qualify, you must have a permanent policy or a convertible term policy and act before the policy expires.
HOW MUCH CAN YOU GET WHEN SELLING YOUR LIFE INSURANCE FOR CASH?
Generally, life settlement payouts range between 10% and 25% of the policy’s death benefit. So, while surrendering a policy might give you a few thousand dollars, a life settlement could pay four to five times more.
For instance, someone with a $500,000 policy might get $10,000 in cash surrender — or $50,000 to $125,000 through a life settlement.
The actual offer you receive may differ. Factors such as your life expectancy, premium costs and current market conditions play significant roles in determining the value of a life settlement payout.
EXPLORE YOUR OPTIONS WITH LIFE SETTLEMENT ADVISORS
Surrendering your life insurance policy might seem the simplest option, but it is not always the smartest. If you qualify for a life settlement, you could walk away with much more than your insurer would offer.
At Life Settlement Advisors, we will help you review your policy, determine your options and see what makes the most sense for you and your loved ones. Before surrendering your life insurance policy, call 1.888.849.0887 or visit us here to request a free, honest estimate of its value.
