Life insurance policies can provide peace of mind for you and financial security for your family. But what happens if you no longer need (or want) your policy? Is there any way to recoup some of the money you’ve spent?
Absolutely. One option is to surrender your life insurance policy. If you make this choice, your policy is canceled and you receive what’s known as the cash value or surrender value. Another option is a life settlement. This choice lets you sell your life insurance policy to an investor and receive a lump-sum payment.
In this piece, we’ll explore what happens if you surrender your policy, examine the types of policy values and cash surrenders, offer a look at the average cash surrender value of a life insurance policy, and provide an alternative to surrender: Settlement.
WHAT IS CASH SURRENDER VALUE FOR LIFE INSURANCE?
Most life insurance types that build cash value — including whole, variable and universal — let you cash out your policy before death and receive the cash surrender value. There may be stipulations around cashing out, such as having held the policy for a specified period or having made all of your premium payments on time. Once you agree to a cash surrender, your policy is canceled and you receive the agreed-upon amount. This means that any named beneficiaries will no longer receive a death benefit.
Term insurance policies typically do not have a cash surrender option, meaning you will not receive any money if you cancel a term policy.
FACE VALUE VS. CASH VALUE: WHAT’S THE DIFFERENCE?
Life insurance policies have two values — face and cash.
The face value of your policy is the amount your beneficiaries will receive upon your demise. For example, if your policy pays out $250,000 to your family in the event of your death, this $250,0000 is the face value. This amount should be listed in your policy documentation and doesn’t change unless you have a policy that lets you access some of its cash value in advance, or if you choose to sell a portion of your policy.
The cash value of your policy is effectively a savings account. Each month, a portion of your premium is deposited into this account. Some accounts are fixed rate, meaning money deposited grows steadily over time. Others include investment, which can help your savings grow more quickly. Some policies allow you to take a portion of this cash out after a set amount of time, while others only let you access this cash value if you choose to surrender your policy.
TYPES OF CASH SURRENDER VALUES IN LIFE INSURANCE
There are two broad types of cash surrender values: Guaranteed and non-guaranteed. Let’s look at both in more detail and explore how to calculate the cash surrender value of life insurance.
Guaranteed Surrender Values
This cash value represents a fixed percentage of your premium payments, and this cash surrender option is often available after three years. The longer you hold your policy, the greater the guaranteed surrender value.
Let’s say you pay $300 per month in premiums for your whole life insurance policy, and you have a guaranteed value percentage of 20%. This means that 20% of every $300 payment, or $60, is deposited into your cash value account. If you hold the policy for 10 years, you make 120 monthly payments, which equals $7,200 in cash surrender value.
Non-guaranteed Surrender Values
Non-guaranteed surrender values include both a fixed premium percentage and any interest or bonuses your policy has earned due to investments. The reason these values are non-guaranteed is because investments are subject to market fluctuations. Depending on how the market has performed, you could walk away with a significantly larger lump sum or lose a portion of your total cash value.
THE AVERAGE LIFE INSURANCE CASH SURRENDER VALUE
The average cash surrender value of a life insurance policy varies significantly based on the total amount of coverage, how long you’ve held the policy, and what fee structures are in place for cash surrender.
For example, if you have $10,000 in guaranteed surrender value on a $100,000 policy but the surrender fee is 10%, you only receive $9,000. Fees can reach as high as 35% depending on when you cancel your policy — you often receive more of your total surrender value after the 10-year mark.
LIFE SETTLEMENTS: AN ALTERNATIVE TO CASH SURRENDER
If you’re thinking that cash surrender values seem low, you’re right.
The terminology gives it away — you’re surrendering your policy. It’s not being purchased by your provider. Instead, the policy is terminated and you receive whatever cash value has accrued (minus any fees, of course).
Life settlements offer an alternative. Instead of surrendering your policy for next to nothing, you can enlist the help of a broker to sell your policy. First, brokers collect information about you and your policy. Then, they work to find multiple purchase offers. Once you’ve made your decision, the policy is sold to the purchaser and you’re given the agreed-upon lump sum. According to data from the Life Insurance Settlement Association (LISA), settlements typically result in payouts five times higher than cash surrender.
The reason these values are higher is because you’re not giving up your policy to access cash value. Instead, you’re selling a policy (or a portion of the policy) to an institutional or private equity investor. This means the policy isn’t canceled — instead, ownership is transferred. Factors such as your age, current health, total policy value and your lifestyle can impact your total settlement value. To get the most from your settlement, work with a trusted and experienced broker.
GET THE MOST OUT OF YOUR LIFE INSURANCE POLICY
At Life Settlement Advisors, it’s our mission to help you learn more about the life settlement process. Equipped with information about your potential cash surrender value, possible policy buyers and the amount you may receive, you’re better prepared to make a decision that’s best for your family and your financial future.
