Minimizing Life Insurance Surrender Value: Strategies And Implications

Life insurance is a financial safety net for loved ones, but circumstances may change and there may come a time when you no longer need or want coverage. Surrendering a life insurance policy is one way to get money back from it, as you can get your cash value minus surrender fees and taxes. Surrendering your policy cancels your life insurance immediately. Your insurer will terminate the coverage and send you a check for the policy's cash surrender value. The cash surrender value is the money a life insurance policyholder receives for ending their coverage before the policy's maturity date or before they pass away, minus any surrender fees and taxes on earnings.

Surrender fees

Some contracts may permit you to withdraw a portion of the funds annually, usually up to 10%, without incurring a surrender charge. It is important to ask your insurance agent or company representative about this option before investing in a specific annuity. Surrender fees tend to decrease over time, so it is ideal to wait until the fee is minimal or non-existent before cancelling a policy. Additionally, the longer you hold the policy, the larger the cash value will likely be.

It is worth noting that term life insurance policies do not build cash value, so there is no cash to be surrendered in these cases. Surrendering a life insurance policy means cancelling the policy and receiving its surrender value, which is the cash value minus any surrender fees. By surrendering the policy, the coverage ends, and beneficiaries will not receive a death benefit.

Surrender value vs cash value

Surrender value and cash value are two terms used in life insurance that sound similar but have distinct meanings. Understanding the differences between the two is crucial if you need to withdraw money from your policy.

Cash Value

Cash value is the sum of money that grows in a cash-value-generating annuity or permanent life insurance policy. It is the money held in your account. Your insurance provider allocates a portion of your premium toward the cost of insurance and another portion toward your cash value account. The cash value money is then invested—often in a bond portfolio—and your policy is credited based on the performance of those investments, as well as any dividends the policy earns.

Cash value is a feature that only applies to permanent life insurance (whole life or universal life, for example) or annuities—not term life insurance. After a certain period, typically 10 to 15 years, surrender costs will no longer be in effect, and your cash value and surrender value will be the same.

Surrender Value

Surrender value is the actual amount of money a policyholder will receive if they try to withdraw all of the policy's cash value. It may be less than the cash value if surrender fees are charged. Surrender value is also referred to as surrender cash value or annuity surrender value in the case of annuities.

Reducing Surrender Value

Surrender fees will reduce the surrender value. These costs and the policy's surrender value can fluctuate over the life of a policy. Surrender fees are typically no longer in effect after 10 to 15 years for a universal life insurance policy.

Cash Value vs. Surrender Value

The cash surrender value of a life insurance policy is equal to the total accumulated cash value, minus prior withdrawals, outstanding loans, and surrender charges. In other words, the surrender value is the cash value minus any surrender fees due when you cash in your life insurance policy.

Surrendering a term life insurance policy

Term life insurance is a type of insurance that covers the life of the policyholder for a specific period. For example, an individual may opt for a cover of five or eight years, and in the event of their death within this period, the insurance company will pay death benefits to their nominee.

Term insurance plans offer various benefits, including critical illness cover, entire or partial disability cover, and tax benefits. However, pure term plans do not have a surrender value, meaning that if you exit the policy before maturity, you will not receive any money back.

If you have a term insurance plan with a savings or investment component, you may be eligible for a surrender value. In this case, if you decide to surrender your term insurance plan, you will receive a portion of your money back as premium (after the deduction of charges). This is called the surrender value, and the insurer qualifies for it.

It is important to note that if you stop paying premiums altogether because you plan to surrender your term insurance plan, it will not accrue any surrender value. For example, if the premium-paying term is less than ten years, you must have paid the premium regularly for two years. If the period is more than ten years, there should be a consistent payment of the premium for three years. If not, there will be no payment of the surrender value to the insured.

Another option is to convert the plan into a paid-up policy. After paying the complete premium amount, the insured person is free of any further payment obligations, and the insurance policy remains intact until the insured's death or voluntary termination of the policy. This arrangement is possible after a minimum period of three years with regular premium payments.

Before surrendering your term insurance policy, consider the reasons why you initially purchased it. Term insurance ensures that your family and nominees do not struggle financially in your absence. It can also cover health and lifestyle risks, providing a sense of security.

Additionally, term insurance can provide peace of mind by covering loans, such as house or car loans, that could become a burden for your dependents if you are no longer there to repay them.

Therefore, carefully consider your reasons for surrendering your term life insurance policy and explore alternative options, such as converting to a paid-up policy or seeking alternative investment opportunities.

Surrendering a permanent life insurance policy

The cash surrender value is different from the cash value of the policy. The cash value is the total sum in the savings component of permanent policies, which grows tax-deferred. The cash surrender value is the cash value minus any surrender fees. Surrender fees typically range from 10-35% and are usually highest in the early years of the policy, phasing out over time.

If you surrender a permanent life insurance policy, you will lose coverage and will no longer be responsible for paying insurance premiums. However, you may have to pay surrender fees and taxes on the surrender value if earnings exceed the amount paid into the policy.

• Contact your insurance company to initiate the surrender process. They will guide you through the steps and documentation required.
• Submit the required documentation, which may include a surrender request form.
• Receive the cash surrender value via check or electronic transfer.
• Obtain a confirmation of policy termination from your insurance provider.

It is important to note that surrendering a life insurance policy may not be the best option for everyone. There are alternatives to surrendering, such as withdrawing funds from the cash value portion of the policy or borrowing against the policy's cash value. Additionally, selling a life insurance policy through a life settlement can result in a higher payout than surrendering it.

When to surrender your policy

There are several scenarios in which it may be best to surrender your life insurance policy for cash.

You've Found a Better Deal

You may be able to qualify for a more affordable policy than your current one. For example, your health may have improved significantly, or you may have quit smoking. In this case, it's worth shopping around for a new policy before surrendering your current one.

You Can't Afford the Premiums

Permanent life insurance is often significantly more expensive than term life insurance. If the premiums are taking a large chunk out of your income, you may be better off with a cheaper term life policy.

You No Longer Need Life Insurance

If no one depends on you financially, you may not need life insurance. In this case, it may not make financial sense to keep your policy.

You Need a Large Amount of Cash Quickly

If you have a major expense to cover and don't have any liquid assets to tap into, surrendering a cash-value life insurance policy may be a good option, especially if your need for life insurance has diminished.

Surrender Charges are Minimal or Non-Existent

Surrender fees tend to decrease over time and may disappear altogether after 10-15 years. The longer you've held the policy, the larger the cash surrender value will likely be.

You Want to Avoid Tax Complications

If you have a corporate-owned life insurance policy with cash surrender value, it may have significant tax implications. Surrendering the policy will help you avoid these complications.

You Want to Use the Cash Value for a Different Purpose

You may decide that you would rather use the cash value of your life insurance policy for something other than paying premiums. For example, you may want to use it to pay off a mortgage or debt, or to invest in something that will offer a better return.

Remember that surrendering your life insurance policy means cancelling the policy and losing the coverage it provides. Your beneficiaries will not receive a death benefit when you die. Make sure to carefully consider your options and the potential impact on your long-term estate planning and goals before surrendering your policy.

Frequently asked questions