Maximizing Life Insurance: Strategies To Boost Cash Surrender Value

Cash surrender value is the amount of money a policyholder receives for cancelling their permanent life insurance policy before it matures or they pass away. This cash value is the savings component of most permanent life insurance policies, such as whole life and universal life. It is also known as the policyholder's equity. The cash surrender value is calculated by subtracting any surrender charges or fees, policy loans, or prior withdrawals from the total accumulated cash value. This value can be paid in a lump sum or through periodic payments, depending on the policy.

Cancelling a permanent life insurance policy before it matures or the policyholder dies

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. Surrender charges can be high, starting at 10% to 35% of your policy cash value, and they diminish over time. Most policies end the surrender charge after 10 to 15 years, at which point the cash surrender value equals your cash value.

If you cancel your policy, you will no longer have to pay premiums, but you will also lose your life insurance protection. Your beneficiaries will no longer receive a death benefit when you pass away.

There are several alternatives to cancelling your permanent life insurance policy. You can take a partial withdrawal, borrow against your cash value, or use your cash value to cover your premiums.

If you have recently purchased a policy, you are likely within the "free look" period, which typically lasts 10 to 30 days, depending on your state. This period allows you to cancel your policy without any financial penalty and receive a full refund of any premiums you've paid.

If you have a term life insurance policy, you can simply stop paying premiums and walk away. However, if you decide to buy life insurance again in the future, your rates will be higher.

If you have a permanent life insurance policy and are over 65, you may be able to exchange it for another policy or an annuity tax-free. You might also be able to sell your policy in a life settlement, especially if you're 75 or older.

Cancelling a permanent life insurance policy is a significant decision that can have financial implications, so it's important to understand the consequences before proceeding.

Surrender charges and fees

Surrender charges, also known as surrender fees, are fees charged to a policyholder when they cancel specific types of life insurance policies before the end of the surrender period. The surrender period typically lasts between 10 and 15 years, but it can be as short as six to eight years. These charges are designed to recoup some of the insurance company's initial costs in setting up and administering the policy.

Calculation of Surrender Charges

Surrender charges are usually calculated as a percentage of the policy's cash value. The percentage decreases over the surrender period, so the older the policy, the lower the surrender fees. Surrender charges can start as high as 10% to 35% of the policy's cash value in the first year and gradually decrease to 0% by the end of the surrender period.

Impact on Cash Surrender Value

When you surrender your policy, the surrender charge is deducted from the policy's cash value, resulting in a lower cash surrender value. The cash surrender value is the amount you actually receive when you cancel your policy. It is calculated by subtracting the surrender charge and any other outstanding fees or loans from the policy's total accumulated cash value.

Avoiding or Reducing Surrender Charges

There are a few ways to avoid or reduce surrender charges:

• "Free Look" Period: Many insurers offer a "Free Look" period, typically 30 days from the policy issuance, during which you can cancel your policy without incurring surrender charges.
• Crisis Waiver: Some policies include a crisis waiver that waives surrender charges in the event of critical illness or disability.
• Wait for the Surrender Period to Lapse: Since surrender charges decrease over time, waiting until the end of the surrender period will result in a 0% surrender charge.
• Choose Policies Without Surrender Charges: Not all life insurance policies have surrender charges. You can opt for policies without these charges to avoid them altogether.

When to Consider Paying Surrender Charges

While it's generally advisable to avoid surrender charges, there may be certain situations where surrendering your policy and paying the fees is the best option:

• Financial Hardship: If you need immediate funds and have no other options, surrendering your policy can provide a source of cash.
• No Longer Need Coverage: If your circumstances change and you no longer require life insurance coverage, surrendering your policy can provide a lump sum payment.
• Switching Policies: If you find a more suitable policy with better rates or terms, surrendering your current policy may be a good long-term decision.

Whole life insurance policies

The cash surrender value of a whole life insurance policy is the guaranteed cash value shown on your policy, plus the value of any dividends accumulated in the policy. This is the amount of cash you've built up, minus any surrender charges or fees. Surrender charges are fees that the insurance company may deduct when you cancel your policy before it matures. These charges decrease over time, so the longer you've had your policy, the less impact they will have on your cash surrender value.

It's important to note that if you surrender your whole life insurance policy, you will lose your life insurance protection. Additionally, you may have to pay taxes on the cash surrender value if it is higher than the amount you've paid in premiums. Therefore, it's essential to carefully consider your options and consult with a financial advisor before making any decisions regarding your whole life insurance policy.

Universal life insurance policies

Universal life insurance is a type of permanent life insurance that builds cash value and is available in several forms. It typically costs less than whole life insurance but does not provide the same guarantees. The cash value and cash surrender value of a universal life insurance policy are based on current interest rates, which may fluctuate throughout the life of the policy. This means that the cash surrender value of a universal life insurance policy can increase if the interest rates rise.

Policyholders of universal life insurance policies can also choose to raise or lower their premium payments within a certain limit. However, paying minimal premiums for too long can negatively impact the cash account and death benefit, and may even cause the policy to lapse. Therefore, it is important for policyholders to carefully consider their premium payments and monitor the cash value of their universal life insurance policies.

The cash surrender value of a universal life insurance policy is the current cash value of the policy less any surrender charges. Surrender charges typically apply during a surrender period, which usually lasts for 10 to 15 years after the policy is taken out. If the policy is surrendered after this period, there are no surrender charges, and the cash surrender value will be equal to the current cash value of the policy.

It is important to note that the cash value in universal life insurance policies grows tax-deferred. This means that as long as the money remains in the policy, it is not taxed, allowing it to grow faster. However, once the cash value is withdrawn or the policy is surrendered, taxes may be owed if the surrender value exceeds the sum of the premiums paid into the policy.

Variable universal life insurance policies

Variable universal life insurance (VUL) is a type of permanent life insurance that combines a death benefit with a savings component, known as the cash value. This coverage can last an entire lifetime as long as the insured continues to pay for it. VUL provides flexibility in terms of premium payments and allows the policyholder to invest and grow the cash value through subaccounts that function similarly to mutual funds.

Flexibility in Premium Payments

VUL allows policyholders to adjust their premium payments annually, depending on their budget. This flexibility sets it apart from other permanent life insurance options. However, it is important to note that the premium must be sufficient to cover the ongoing insurance costs of the policy. The remainder of the premium payments contributes to the policy's cash value.

Investment Options with Subaccounts

Variable universal life insurance offers a range of investment options through subaccounts. These subaccounts are similar to mutual funds and provide access to various stock and bond accounts, as well as money market options. Policyholders can choose how to allocate their cash value among these subaccounts, allowing them to align their investments with their risk tolerance and financial objectives.

Tax-Deferred Growth

The growth of the cash value in a VUL policy is tax-deferred. This means that policyholders do not pay taxes on the growth of their cash value until they withdraw or borrow funds. This feature makes VUL attractive to individuals who have already maximised their contributions to traditional retirement accounts and are seeking additional tax-advantaged investment opportunities.

Accessing the Cash Value

Policyholders can access their cash value by withdrawing funds or borrowing against it. Withdrawing funds reduces the death benefit, while borrowing does not. However, if a loan is taken out against the cash value, the insurance company will charge interest until the loan is repaid.

Risk and Fees

While VUL offers the potential for high returns, it also carries a higher level of risk compared to other permanent life insurance options. The cash value is subject to market fluctuations, and it is possible to lose money. Additionally, VUL policies often come with various fees, including mortality and expense fees, sales and administrative fees, and investment management fees. These fees can eat into the cash value, reducing the overall returns.

Suitability

VUL is most suitable for individuals with a high net worth who are comfortable with a hands-on investment approach and have a higher risk tolerance. It may be a good option for those who have already maximised their contributions to traditional retirement accounts and are seeking additional tax-advantaged investment opportunities. However, due to its complexity, high cost, and risk, VUL may not be the best choice for most people.

Frequently asked questions