While most people buy life insurance to create a financial safety net for loved ones, your situation may change and there may come a time when you no longer need or want coverage anymore. 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.
In this post, we’ll explain what happens when you surrender a life insurance policy and how to decide if you should do it.
What does it mean to surrender a life insurance policy?
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. 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.
The cash surrender value differs from the policy’s cash value, which is the total sum in the savings component of permanent policies like whole and universal life insurance. The value differs because of surrender fees, which typically range from 10-35%. Surrender fees are usually high in the early years of the policy and then gradually phase out over time. Most policies also have a waiting period of a few years up to 15 years before you have the option to surrender it.
There is no difference between canceling and surrendering a life insurance policy. Whether you surrender or lapse the policy by stopping payments, you’ll still receive the cash surrender value minus any surrender charges and taxes.
When a policy is surrendered for its cash value, you’ll lose coverage and no longer be responsible for paying insurance premiums. You may have to pay surrender fees for canceling your coverage early, which will be deducted from any cash value your policy has or paid out of pocket if you have a term policy. You may also have to pay taxes on the surrender value if earnings exceed the amount you’ve paid into the policy.
For example, someone who’s paid $20,000 into a policy through premiums but has a cash value of $30,000 will need to pay taxes on the $10,000 in earnings over what was paid in. The amount of taxes you’ll pay depends on your income bracket, but let’s say 22% which would equate to $2,200. That means your cash surrender value would be $27,200 before fees, which range from 10-35% of the policy’s cash value. Assuming surrender fees are 20%, that would be another $5,440 that gets taken out, leaving you with a final cash surrender value of $21,760.
If you have a term life insurance policy, it can be surrendered but you won’t get any money back because these policies don’t have any cash surrender value. When you surrender a term policy, the only benefit is that you won’t have to pay premiums anymore.
Each person’s situation is different, but the most common reasons for surrendering a life insurance policy include:
- No longer need coverage: Life insurance can help provide for your loved ones when you pass away, but coverage may not be necessary after children are grown up and independent.
- Costs: Insurance premiums are expensive and can become unaffordable over time. Surrendering means you will no longer need to keep paying premiums and can use that money for other needs.
- Better policy: You may find that a policy you purchased in the past is no longer a good fit for your current needs, so you can surrender it and get a new policy that offers better coverage or cheaper premiums.
- Cash needs: If you’re urgently in need of cash, surrendering your policy will award you a lump sum. However, you may also be able to get cash through other methods like selling, which can award a higher payout.
There are several reasons why someone might surrender a policy, but it has major implications. You’ll receive a large payout and no longer have to pay premiums, but will also lose coverage unless you replace it with a new policy.
To surrender a life insurance policy, you must generally wait until after the surrender period is over, which can be anywhere from a few years up to 15 years. If you surrender earlier, you’ll have to pay higher surrender charges, which reduces the cash surrender value you receive. The surrender charges go down over time and may disappear completely after the surrender period ends. If you want to surrender your policy and can afford to delay the process, waiting until surrender fees have decreased will help you get more money.
However, you may find the policy becomes unaffordable in your budget or you simply don’t need coverage anymore. In this case, it makes sense to surrender the policy sooner to avoid paying premiums. In either situation, we’d also note that surrendering should only be used as a last resort because alternative options like selling the policy will yield a higher payout.
Surrendering your life insurance policy is a straightforward process. To start, you’ll want to gather your policy documents including the contract, amendments, and payment receipts. Next, notify your life insurance provider that you’d like to surrender your policy. The insurer will guide you through their process, which will typically include paperwork such as termination and surrender forms. The insurer will review the paperwork and may take anywhere from 7 to 30 business days to process the request.
Once the surrender request has been approved, the insurer will pay you the cash surrender value through a check or direct deposit. The amount you receive will be the cash surrender value minus any surrender fees and outstanding debts if you had a loan on the policy. You may also have to pay income taxes on proceeds if your payout exceeds the premiums you paid, so it’s a good idea to talk about this with the insurer or a tax professional.
Surrendering a life insurance policy is a life-changing decision that affects you and your family, so you should carefully the pros and cons of this option:
Pros
- Easy and fast: Surrendering your policy is a simple and quick process, just tell your insurance company that you’d like to surrender and let them work out the details of your policy to determine the cash surrender value you’ll get back. There’s no negotiation or middleman, the insurance company will give you an offer and you can choose to accept it and surrender, or reject it and continue coverage.
- Get some money back: Surrendering your policy means you’ll get some money back, which is better than getting nothing. Some people may lapse their policy by choosing not to pay, but surrendering is a better option than this because it returns some value.
Cons
- Minimal return: Surrendering your policy means you’ll only get one offer from the insurance company, and their goal is to give you as little money as possible. On the other hand, selling a policy through a life settlement means a life settlement company can present your policy to multiple institutional investors and get you a fast, fair offer. For reference, selling a policy can result in a value 4 to 11 times higher than the cash surrender value. If you’re interested in finding out how much you can sell your policy for, get a free estimate from Harbor Life Settlements today.
- Surrender fees: Insurance carriers often charge fees for surrendering a policy, which will come out of the cash surrender value you’d get back. These fees can be up to 10-35% of the proceeds you’ll get, depending on when you surrender it.
- Limited options: When surrendering a policy, the insurance company will give you a take it or leave it offer. There isn’t room to negotiate, you can either accept it or reject it. These limited options aren’t in your best interest, as you’ll find more flexibility by taking your policy to the open market where you can get several offers through a life settlement.
Should you surrender your life insurance policy?
In short, it’s not advisable to surrender a life insurance policy because selling it yields higher cash proceeds. According to LISA’s 2023 Market Data Collection Survey, selling a policy averaged 622% higher payouts than policyholders would have received from the cash surrender value. This is because your policy’s value is always going to be higher on the secondary market than what’s offered by insurers.
When you surrender your policy to the insurance company, you only get a single offer. On the other hand, selling it enables you to seek multiple offers and negotiate among buyers which allows you to get the highest possible value for your policy.
If you’re interested in selling your policy but aren’t sure where to start, contact Harbor Life Settlements. We’ll answer all of your questions, guide you through the process, and provide you with a free cash estimate on the value of your policy. If you choose to work with us, we’ll help you get the highest cash value for your policy while taking care of all the work so the process is as easy as possible for you. You can also use our Life Settlement Calculator to instantly see how much your policy is worth.
