Canceling Variable Universal Life Insurance: A Step-By-Step Guide

Variable universal life insurance is a type of permanent life insurance policy that offers lifelong coverage and combines a death benefit with a savings component, known as the cash value. While variable universal life insurance provides the flexibility to change premium payment amounts and invest the cash value to produce greater returns, it also comes with certain drawbacks and risks. This article will provide a comprehensive guide on how to cancel variable universal life insurance, highlighting important considerations and alternatives to ensure informed decision-making.

Understand the fees and taxes associated with cancellation

Variable universal life insurance is a type of permanent life insurance that offers both a death benefit and a cash value component. The cash value of the policy can be invested in sub-accounts that reflect investment accounts, with the potential for higher returns than other types of permanent life insurance. However, it's important to understand the fees and taxes associated with cancelling this type of policy.

First, it's important to note that variable universal life insurance policies typically have a surrender period, which can extend up to 15 years. During this period, you may be subject to surrender charges if you cancel your policy. These charges can be significant, ranging from 10% to 15% of your cash value balance, and are meant to compensate the insurance company for sales expenses. It's essential to review the terms of your policy to understand the specific surrender charges that may apply.

In addition to surrender charges, there are other fees and expenses associated with variable universal life insurance policies. These can include sales fees, mortality and expense risk fees, cost of insurance, administration fees, loan interest, and underlying fund expenses. Be sure to carefully review the prospectus or consult with a financial professional to understand all the fees that may apply.

When cancelling your policy, you may also be subject to taxes. The cash value of your policy has likely grown on a tax-deferred basis, so you will need to pay federal income taxes on any amount you withdraw. If your cash value is less than your premium payments, you may not be able to take a loss on the investment. Additionally, if your policy has outstanding loans at the time of cancellation, you may owe federal income taxes on the unpaid amount.

It's important to carefully consider the fees and taxes associated with cancelling your variable universal life insurance policy. These charges can significantly impact the amount of money you ultimately receive. Consult with a financial professional or tax advisor to fully understand the implications of cancelling your policy.

Contact your insurance agent or company

To cancel your variable universal life insurance, you will need to contact your insurance agent or company. Here are the steps you should follow:

• Get in touch with the insurance agent who manages your policy or a customer service representative at the insurance company. Ask them to provide a detailed account of all the premiums paid into the policy, as well as the current cash value.
• Calculate the total amount of premiums paid and subtract this from the cash value. This difference will be added to your income taxes, as the premiums are not taxed since they are paid with after-tax dollars.
• Review the contract terms for the surrender period. A surrender period is a clause in any variable whole life policy that requires you to maintain the account or pay a penalty for early withdrawal. Surrender periods can last up to 15 years, with a decreasing percentage charge each year.
• Calculate any surrender charges you may incur. For example, if you have a $100,000 cash value with a 2% surrender charge, you will be charged $2,000.
• Ask the insurance agent to move all your assets to cash if you are concerned about fluctuations in the cash value while waiting for the surrender process to be completed.
• Obtain a surrender form from the insurance company and fill it out. Make sure to keep a copy of the form and your policy for your records.
• Submit the completed surrender form and a copy of your policy to the insurance company. It typically takes around 10 days to receive the payout, which will be the cash value minus any surrender charges and taxes.

Remember, before deciding to cancel your variable universal life insurance, it is essential to carefully review your policy, understand the applicable fees and taxes, and consider seeking professional financial advice.

Review the contract terms for the surrender period

Variable universal life insurance is a type of permanent insurance. This means that as long as the premiums are paid, the policy will pay benefits upon the death of the insured, regardless of how long they live.

Variable universal life insurance can also be used as a supplemental savings plan because it allows investors to invest in mutual funds in a tax-deferred structure. Surrendering the policy requires understanding the applicable fees and taxes.

The surrender period is part of any variable whole life policy and requires that you maintain the account or pay a penalty for withdrawal. A variable whole life policy may have a surrender period extending out as far as 15 years and starting at a 15% surrender charge, dropping a percentage each year. Surrender charges can last up to a decade or two, so unless your policy is old, expect to be hit hard.

The surrender period is a crucial aspect of variable universal life insurance policies. It refers to a specified duration during which you are required to maintain your policy without making any withdrawals. If you decide to withdraw your money or cancel your policy during this period, you will be subject to surrender charges or penalties. These charges are essentially fees imposed by the insurance company to recover the costs of setting up and administering your policy.

The length of the surrender period can vary depending on the insurance company and the specific policy you have purchased. It is important to carefully review the contract terms provided by your insurance company to determine the length of the surrender period applicable to your policy. Typically, surrender periods for variable universal life insurance policies can range from 10 to 15 years.

During the surrender period, if you decide to withdraw a portion of your cash value or surrender your policy entirely, you will be charged a percentage of your cash value as a penalty. These surrender charges are designed to discourage policyholders from withdrawing their money prematurely and help insurance companies recover the costs associated with the policy.

It's important to note that the surrender charges usually decrease over time. In most cases, they follow a schedule where the charge decreases by a certain percentage each year. For example, the surrender charge may start at 15% in the first year and gradually drop to 0% by the end of the surrender period. This means that the longer you wait to withdraw your money or cancel your policy, the lower the surrender charge you will have to pay.

When reviewing the contract terms for the surrender period, pay close attention to the schedule of surrender charges. This schedule will outline the specific percentage charges applied for each year within the surrender period. Additionally, some policies may offer a reduced surrender charge if you withdraw your money after a certain number of years, even if it is still within the surrender period.

Understanding the surrender period and the associated charges is crucial when considering cancelling your variable universal life insurance policy. By reviewing the contract terms, you can make an informed decision about the potential costs and implications of surrendering your policy. It is also important to note that there may be alternative options, such as taking a loan against your policy or using the cash value to cover your premiums, which can help you avoid surrender charges while still accessing your money.

Calculate any surrender charges

Surrender charges are fees charged to a policyholder when they cancel their variable universal life insurance policy before the surrender period ends. These charges are designed to recoup some of the insurance company's initial costs in setting up the policy and discourage early policy termination. The surrender period typically lasts between 10 and 15 years, and the charges decrease over time.

To calculate the surrender charges, you need to determine the percentage of the surrender charge relative to the policy's cash value. This percentage is outlined in the surrender charge schedule provided by the insurance company and decreases annually. For example, if your policy's cash value is $50,000 and you decide to surrender it in the sixth year of a 10-year surrender period, and the surrender charge for that year is 5%, you will be charged $2,500. Thus, you will receive a cash surrender value of $47,500 ($50,000 - $2,500) from your policy.

It is important to note that surrender charges can significantly impact the cash surrender value of your policy, especially if the policy is relatively new. In some cases, the surrender charge may be greater than or equal to the actual cash value, resulting in minimal or no payout upon cancellation. Therefore, it is crucial to review the surrender charge schedule and understand the applicable fees before deciding to cancel your variable universal life insurance policy.

Obtain, fill out, and submit the surrender form

To cancel or surrender your variable universal life insurance policy, you will need to obtain, fill out, and submit a surrender form. Here is a detailed guide on how to do this:

Obtaining the Surrender Form:

First, contact your insurance agent or the customer service department of your insurance company. You can do this by phone, email, or through your online account if you have one. Request the surrender form, which is the document you need to initiate the cancellation process. The insurance company is required to provide you with this form upon request. Make sure to ask about any other documents that may be needed to complete the surrender process.

Filling Out the Surrender Form:

Once you have obtained the surrender form, carefully read through it and fill out all the required sections. Provide all the necessary information accurately and completely. This may include your personal information, policy number, and the reason for surrendering the policy. Be sure to sign the form, as it may require your signature to authorize the cancellation.

Submitting the Surrender Form:

After you have completed the surrender form, make a copy for your own records. Submit the original signed form to your insurance company, along with any other required documentation. You can submit the form by mail, fax, or secure online portal, depending on the options provided by your insurance company. Keep the copy of the form and your policy in a safe place for future reference.

Understanding Fees and Taxes:

Before submitting the surrender form, it is important to understand the applicable fees and taxes. Contact your insurance agent or the insurance company to request an account of all premiums paid and the existing cash value of your policy. Calculate the total premiums paid and subtract this amount from the cash value. This difference will be added to your income taxes, as the gains are treated as taxable income. Additionally, there may be surrender charges or penalties if you cancel within a certain time frame, so be sure to review the terms of your policy.

Receiving the Surrender Value:

After submitting the surrender form and any required documentation, the insurance company will process your request. It typically takes around 10 days to receive the check for the surrender value of your policy. The amount you receive will have any applicable surrender charges and taxes deducted. If you have any concerns or questions during this process, don't hesitate to contact your insurance agent or the insurance company's customer service department for assistance.

Frequently asked questions