Surrendering Your Life Insurance Policy

Published December 7, 2022

surrendering life insurance policy

Planning for the future can be a bit unnerving, no matter your age or where you are in life. After a lifetime of working and saving, you may still find yourself tight on cash to meet your everyday expenses during your retirement. Chances are, at some point while planning for your later years, you purchased a life insurance policy to provide your loved ones with a layer of financial protection.

While life insurance policies are an essential part of planning for your future, there may come a time when you decide to give up life insurance coverage. Whether your coverage is no longer needed or you would rather receive the cash value, you should understand exactly what happens when you decide to surrender your life insurance policy. Learn what happens when you surrender your policy and the important considerations you should keep in mind before doing so.

What Does Surrendering a Life Insurance Policy Mean?

If you own a life insurance policy, you may be wondering whatexactly surrendering a life insurance policy means? In a nutshell:

Surrendering a life insurance policy is opting out or canceling your existing policy.

When you surrender your policy, you’re telling the insurance company that you no longer wish to receive life insurance coverage, and in exchange, want to receive the policy’s accrued cash value. As the policyowner, when you surrender your life insurance policy, you also forgo the death benefit to your beneficiaries.

Depending on the type of life insurance policy you own, and whether it has a cash value or investment aspect, the process of surrendering is relatively simple. In most cases, your insurer will immediately terminate the coverage and send you a check for the policy’s cash surrender value. This is the balance in your policy’s cash value account, minus any applicable surrender fees your insurer may charge. The reason people surrender their life insurance policy for the cash value is because it alleviates them of the burden of monthly premiums, creating an opportunity to use this money for other investments or necessities. 

Life insurance policies can accrue a significant amount of cash value—or none at all—depending on the policy’s age and type. Generally, older policies have a higher cash surrender policy. Cash value builds slowly and picks up momentum over time. When a life insurance policy is first purchased, you may notice little movement in your cash value balance—but after a few years, the balance grows significantly. Surrender fees are also higher during the early years of the policy, but they phase out over time. Whole and universal policies accrue cash value, so these policy types are the most attractive option to surrender.

What Happens When You Surrender a Whole Life Policy?

When you surrender a whole life insurance policy, you immediately lose coverage and are no longer required to pay the insurance premiums. Because a whole life policy is intended to cover you for the remainder of your life,it accumulates cash value over time. Shortly after you surrender your policy, you receive this cash value minus any surrender fees. This money is yours, and can be used in whatever way you choose. As long as you’ve paid more in premiums than the amount you receive back, the proceeds are tax-free.

The process of cashing in term life insurance is slightly different. Also known as “temporary” life insurance, term life insurance is only meant to cover policyholders for a specific amount (or term) of time. Since this policy type is valid for a predetermined number of years, it doesn’t accrue a cash value Term life insurance is generally a more affordable option than permanent policies and provides sufficient coverage for beneficiaries in the event of premature death.

Should You Surrender Your Life Insurance Policy?

Many seniors find it difficult living without a dependable source of income when they reach retirement, especially when unexpected medical problems or expenses arise. Instead of living in constant worry about whether their money will last, some seniors opt to surrender their life insurance policy. There are many reasons why seniors decide to surrender their life insurance policy, but the most typical are:

  • Coverage is no longer needed: A common scenario for no longer requiring life insurance coverage is when you’ve named your children as beneficiaries, but as they mature into adults, they are financially stable and no longer need the coverage. Another reason may be your spouse is your beneficiary, and they have predeceased you. Or you are getting a divorce, and you don’t have a replacement beneficiary—so you no longer need to provide financial protection.
  • Get the cash value: As previously mentioned, when surrendering a life insurance policy, the policyholder receives the cash surrender value. Surrendering a policy can be a quick source of cash during retirement and living life without a paycheck. Just keep in mind the potential surrender fees associated with your policy.
  • Less expensive coverage is available: It’s not uncommon to shop around when purchasing large items like cars or appliances, so why should life insurance be any different? Maybe your health has improved since purchasing your last policy, or your current premiums have become too expensive. Or maybe you have access to an equivalent or better life insurance policy for a lower price. No matter the reason, you can surrender your current policy to take out new coverage.
  • Unforeseen medical expenses: Whether it’s surgery, injury, short-term or long-term medical care, surrendering your life insurance policy can help cover costs related to unforeseen medical care.

Before you surrender a life insurance policy, make sure to speak with your insurer to find out what your policy is worth in a life settlement transaction.

Are There Any Alternatives to Surrendering a Life Insurance Policy?

There are other options to consider before surrendering your life insurance policy. For instance, it’s possible to withdraw limited amounts of cash from your life insurance policy, but keep in mind that the amount available varies depending on your insurer and the type of policy you own. If you wish to access the cash value in your policy, here are some of the ways you can do that.

Direct Withdrawal

In a direct withdrawal, money is taken out of your cash value, but enough is left to keep the policy in force. As the policyholder, you’re still required to keep paying policy premiums. You can keep the death benefit protection, however, it will be reduced based on the amount of money you withdraw.

Borrow Money from the Cash Value

Another common way to access your life insurance policy’s cash value is to take out a loan and use the policy as collateral. Essentially, you’re borrowing your own money out of your life insurance policy. The interest on your loan is based on your policy’s cash value, and the interest rate is usually less than what you would pay to other traditional lenders. This is a good option for individuals with low or poor credit scores, since there aren’t underwriting requirements for this type of loan.

Life Settlement

Did you know you can sell your life insurance policy? The most profitable way to terminate life insurance coverage is through a life settlement. In this process, a qualified buyer purchases your policy, and you walk away with a lump sum at the time of sale. In turn, the buyer assumes the responsibility of paying the premiums and receives the death benefit when you die. This is a valuable alternative to surrendering your life insurance policy, and has the potential for a larger payout than surrendering. As mentioned above, be sure to speak with your insurer to find out what your policy is worth in a life settlement transaction before surrendering it.

Understanding what it means to surrender a life insurance policy can make all the difference when it comes to having needed cash in your retirement. Although all life insurance policies can be surrendered, only certain ones have a cash value. Whole life insurance policies have a cash surrender value, while term life insurance policies do not. Before surrendering your policy, make sure to speak with your insurer or financial advisor about what option is best for you. 

Are you considering a life settlement for your life insurance policy? Are you wondering if you are eligible to sell your life insurance policy? Learn more about selling your policy and find out if you qualify for a life settlement by contacting the experts at Coventry Direct today.

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