How Do I Surrender A Life Insurance Policy?

If you have a permanent life insurance policy, you may be able to access the cash value component in several ways. These include withdrawing funds, borrowing against the cash value, selling the policy in a life settlement, or surrendering the policy. Surrendering a policy means canceling it and receiving its surrender value, which is the cash value minus any surrender fees. However, your beneficiaries will not receive a death benefit when you die.

It’s important to note that surrendering a policy may trigger taxes on the amount you receive that’s above the cost basis. The surrender value is based on the portion of premiums that went into the cash value account plus the interest rate paid or investment gains, minus any outstanding loans and surrender fees. If the cash surrender value is worth more than you’ve paid in premiums, you will need to pay income taxes on the difference.

Here is a table summarizing the different options for accessing cash value in a life insurance policy:

Option	How it works	Pros	Cons
Withdraw funds	Take out money up to the amount you’ve paid in premiums. You won’t owe taxes as long as you don’t withdraw gains.	No taxes on withdrawals up to cost basis; no impact on death benefit.	Withdrawals above cost basis are taxed; reduces death benefit.
Borrow against cash value	Take out a loan against your cash value. You pay interest, but rates are typically low.	No loan application or credit check; low interest rates.	Outstanding balance deducted from death benefit if you die before repaying loan.
Sell in a life settlement	Sell the policy to a third party for a one-time cash payment. The buyer takes over the policy and receives the death benefit.	May receive more than surrender value; buyer assumes responsibility for policy.	Generally intended for older people in declining health.
Surrender policy	Cancel the policy and receive surrender value, which is cash value minus surrender fees.	Access to cash value; no loan to repay.	Beneficiaries receive no death benefit; surrender fees and taxes may apply.

When considering surrendering a policy, keep in mind that surrender fees tend to decrease over time. Ideally, you would wait until the fee is minimal or nonexistent. Also, the longer you’ve held the policy, the larger the cash value portion will likely be. Finally, think about how surrendering the policy will impact your long-term estate planning and goals.

There may be better options for accessing cash value in your life insurance policy, depending on your needs. For example, if you have a major expense to cover or a better investment opportunity, surrendering the policy may not be the best choice. Speak with a financial advisor to determine the best option for you.