Understanding Life Insurance Surrender Requests: Your Guide

Life insurance policyholders may find themselves in a position where they no longer want or need their life insurance policy. In such cases, they can opt to surrender their policy by terminating their life insurance in exchange for a cash payout. This payout is known as the cash surrender value and is calculated as the total accrued cash value minus any applicable fees, outstanding loans, or interest owed. Policyholders can initiate the surrender process by contacting their insurance company and submitting a surrender request form. It is important to note that surrendering a life insurance policy has consequences, including the loss of life insurance coverage and potential financial loss due to surrender fees and taxes.

Surrendering a life insurance policy

Reasons for Surrendering a Life Insurance Policy

People may choose to surrender their life insurance policy for several reasons:

• Adult children are no longer financially dependent.
• A spouse has passed away.
• Financial instability makes it challenging to pay premiums.
• Better investment opportunities arise.
• Unexpected expenses arise.

Process of Surrendering a Life Insurance Policy

The process of surrendering a life insurance policy is relatively straightforward:

• Contact your insurance company to initiate the surrender process and gather information about the necessary steps and documentation.
• Submit the required documentation, which may include a surrender request form.
• Receive the cash surrender value via check or electronic transfer.
• Obtain policy termination confirmation from your insurance provider.

Cash Surrender Value vs. Cash Value

It is important to distinguish between cash surrender value and cash value in life insurance policies. Cash value is the amount of money that accumulates over time in a permanent life insurance policy, and it can be accessed through loans or withdrawals. On the other hand, cash surrender value is the amount of money that will be returned to the policyholder upon surrendering the policy. It includes the cash value minus any fees, loans, or premiums owed.

Consequences of Surrendering a Life Insurance Policy

There are a few consequences to consider before surrendering a life insurance policy:

• Loss of life insurance coverage: Once the policy is surrendered, the coverage ends, and beneficiaries will not receive a death benefit upon the insured's death.
• Financial loss: The cash surrender value may be lower than the total premiums paid, resulting in a financial loss. Additionally, surrender fees and taxes may apply.
• Tax implications: If there is an outstanding loan from the policy, surrendering it may result in tax implications.

Alternatives to Surrendering a Life Insurance Policy

Before surrendering a life insurance policy, it is worth considering alternatives such as:

• Partial surrender: This involves withdrawing a portion of the policy's cash value while keeping the life insurance contract in place.
• Life settlement: Selling the policy to a third party can often result in a higher payout than surrendering it.
• Withdrawal: In most cases, a cash withdrawal from a permanent life policy is not subject to income taxes if it is up to the amount paid in premiums.
• Loans: Borrowing against the policy's cash value is another option, although interest payments will apply.
• Using cash value to pay premiums: The money in the cash value can be used to pay life insurance premiums, making it easier to maintain coverage.

Cancelling vs surrendering

Cancelling and surrendering a life insurance policy are the same thing. When you surrender a life insurance policy, you are cancelling it. You will no longer owe premiums, and if you pass away, your beneficiary will not receive a death benefit payment.

While the terms are interchangeable, it is important to understand the implications of surrendering a life insurance policy.

Firstly, you will lose coverage, and your beneficiaries will no longer receive a payout upon your death. Secondly, you may have to pay surrender fees for cancelling your coverage early. These fees are usually high in the early years of the policy and can range from 10-35% of the total cash value. They gradually decrease over time and may disappear after a certain number of years.

Additionally, you may have to pay taxes on the surrender value if your earnings exceed the amount you've paid into the policy. The amount of tax depends on your income bracket. Consult a tax professional to understand the tax implications for your specific situation.

Before surrendering your life insurance policy, carefully consider the pros and cons. While surrendering can provide a lump sum of cash, it also means losing coverage for your loved ones. Alternative options, such as selling the policy, may yield a higher payout.

Furthermore, the amount you receive when surrendering your policy is often lower than the accumulated cash value, taking into account surrender fees and taxes. If you have a term life insurance policy, you won't receive any money back, as these policies don't have a cash surrender value.

In summary, while cancelling and surrendering a life insurance policy refer to the same action, it's important to understand the financial implications and explore alternative options before making a decision.

Cash surrender value

The cash surrender value is the total accumulated cash value, minus any prior withdrawals, outstanding loans, and surrender charges. Surrender charges can be high, typically ranging from 10% to 35% of the policy's cash value, and they decrease over time. Most policies end the surrender charge after 10 to 15 years.

When a policy is surrendered, the policyholder's coverage is terminated immediately, and they are sent a check for the cash surrender value, minus any surrender fees and taxes on earnings. Surrender fees are usually highest in the early years of the policy and gradually decrease over time.

It is important to note that cash surrender value is different from the policy's cash value, which is the total sum in the savings component of permanent policies. The cash value grows over time and can be accessed in various ways, such as policy loans or helping to pay premiums.

There are several alternatives to surrendering a life insurance policy, including partial withdrawal, taking out a loan against the cash value, or using the cash value to cover premiums. Surrendering a policy may not always be the best option, as it results in the loss of life insurance protection and may incur fees and a reduction in the cash value.

Partial surrender

A partial surrender of a life insurance policy allows the policyholder to withdraw a portion of the policy's cash value while keeping the policy in force. This means the policy owner can remove some of the cash value without cancelling the entire policy.

Universal life insurance policies and whole life insurance permit partial surrenders, but the two policy types approach this differently. Universal life insurance policies allow the policyholder to withdraw any cash surrender value whenever they want, with little to no effect on the death benefit. Whole life insurance policies have more specific rules about partial surrenders. Policy owners can only withdraw cash value created either through the elective paid-up additions rider or dividends used to purchase paid-up additions.

A partial surrender can be a strategic financial move for someone facing financial hardship. It allows policyholders to access funds while keeping their life insurance protection intact. For example, a policyholder might choose to surrender a portion of their life insurance if they are facing financial stress, such as medical bills or a leaking roof. They can then let the cash value build back up over time as they continue paying premiums.

It's important to note that a partial surrender will reduce the death benefit and the cash value of the policy. There may also be partial surrender charges, and tax consequences depending on the amount withdrawn.

Surrender fees

It is important to carefully consider the pros and cons of surrendering a life insurance policy, as it is a life-changing decision. While it offers a quick and easy way to access cash, the policyholder may receive a minimal return on their investment due to the surrender fees and taxes deducted from the cash surrender value. Additionally, the policyholder will lose their life insurance protection, impacting their listed beneficiaries.

To make an informed decision, it is advisable to consult a financial professional who can guide you through the benefits and implications of a partial or full surrender.

Frequently asked questions