What Does It Mean To Surrender Your Life Insurance Policy?

If you have a permanent life insurance policy, it likely has a cash value component that allows you to access the money as the policyholder. There are several ways to access the cash value of your policy, including withdrawing funds, borrowing against the policy, and surrendering the policy. However, each option has its implications, and it’s essential to understand them before taking any action.

Withdrawing funds from cash valueNo taxes owed on the cost basis, but taxes owed on gains. Reduces death benefit.
Borrowing against cash valueLow-interest rate but reduces death benefit. Outstanding balance deducted from death benefit if not repaid before death.
Surrendering the policyCancels the policy, and beneficiaries receive no death benefit. Owe taxes on the amount above the cost basis.
Selling the policy in a life settlementReceives a one-time cash payment. Buyer assumes responsibility for the policy and receives the death benefit when you die.

The surrender value of a policy is based on the portion of premiums that went into the cash value account plus the interest rate paid or investment gains. From that, outstanding loans are subtracted, along with any surrender fee. Some policies take many years to build up any substantial cash value, so you might not have much cash value anyway.

Remember that if your cash surrender value is worth more than you’ve paid in premiums, you will need to pay income taxes on the difference. Also, beneficiaries won’t receive a death benefit if you surrender your policy, so consider how each method will impact your long-term estate planning and goals.

When to consider surrendering your policy

Here are some scenarios when surrendering your policy may make sense:

  • You’re able to qualify for a more affordable policy today versus when you first took out your current one.
  • The premiums are taking a big bite out of your income, and a cheaper term life policy may be a better option.
  • You no longer need life insurance coverage, or it may not make financial sense to keep the policy in-force.
  • You need cash to cover a major expense or investment opportunity, and your need for life insurance has diminished.

Before taking any action, it’s important to weigh the pros and cons of each option and consult with a financial advisor or tax professional to determine the best course of action for your financial situation.

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