How To Surrender A Life Insurance Policy

Life insurance isn’t a one-size-fits-all financial solution. In fact, a life insurance policy that used to meet your needs may no longer be needed or wanted. People with grown children often find that the amount of life insurance they needed to protect their family’s finances with children living at home far exceeds their current needs. The policy’s premiums may have become unaffordable over the years, or the policy owner may simply want to eliminate that extra bill and put the money elsewhere. Whole life insurance has a built-in savings element that allows the policy owner to borrow against the policy’s cash value after a certain amount of time. Eventually, the cash value in the policy may be large enough to pay the ongoing premiums.

When Does It Make Sense To Surrender Your Life Insurance Policy?

Surrendering your life insurance policy means that you are terminating your relationship with the life insurance company. Your beneficiaries will not be able to claim a death benefit from your life insurance policy after you die. The policyholder gets some of the policy’s cash value in exchange for surrendering the policy, which averages about 10% of the policy’s face value.1

Life Insurance Isn’t Needed

If you plan to divorce and your spouse is your beneficiary, you can initiate a beneficiary change with the insurance company or terminate the policy. If you want to stop paying premiums and continuing life insurance with your spouse as the beneficiary isn’t part of your divorce agreement or court order, you may be able to surrender the policy and get some cash out of it. Parents with kids that are now self-sufficient may realize that their life insurance doesn’t match their lifestyle. While it’s important to have some coverage if you need to provide for burial and funeral costs, you may not need hundreds of thousands of dollars in life insurance benefits.

Life Insurance Premiums Are Too Expensive

Some policies have premiums that go up over time. If your financial situation changes and you have to cut expenses, it could make sense to let your expensive life insurance go back to the insurer and get the cash value out of the policy.

Need A Source of Cash

Whether you are facing medical bills, the loss of a job, or another financial challenge, it can be tempting to surrender your life insurance policy for the cash value to help solve the problem. Before you give up your death benefit, explore the option of taking out a loan against your policy’s cash value. You’ll have to either pay the loan back or the outstanding debt will reduce your beneficiary’s payout when you die. If you simply want to get the highest possible amount of money out of your life insurance policy, consider selling your policy through a life settlement.

You Can Get The Same Coverage For Less Money

If your health has drastically improved due to weight loss or smoking cessation, you may find that initiating a new policy earns you a lower premium. Before terminating your current policy, shop around for the best rates. You may also be able to exchange your current policy through a Tax-Free 1035 Exchange. Taxpayers can replace their current life insurance policy or annuity without tax consequences if your new policy has better benefits, different investment options, or lower fees.2
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How To Surrender Your Life Insurance Policy; Step By Step

Your life insurance company will offer the guidance you need to surrender your life insurance policy, terminate your coverage, and receive the surrender value.

  1. Start by contacting the insurance company directly. Tell them you want to start the process of surrendering your policy. Have your policy number and your social security number on hand.
  2. Ask for the exact amount of your policy’s cash value, and find out how much you’ll pay in fees so you can understand how much money you may receive when you surrender your policy.
  3. The customer service representative will email or mail you a surrender form. You may also be able to access the form through the life insurance company’s website. If the life insurance company will accept a letter of instruction as proof that you want to cancel the policy, ask them what information you need to include in the letter.
  4. Fill out the form or write the letter. Mail it to the address indicated on the form or website. Be sure to use certified mail so you can track and verify delivery of your paperwork.
  5. When you have verification that your paperwork has been received by the life insurance company, call customer service to confirm that they have processed your request.
  6. If there is money left after surrender fees, make arrangements to have the cash directly deposited into your bank account or ask the company to send you a check with the letter confirming the cancellation of your policy.

Tax Consequences of Surrendering Your Life Insurance Policy

If you get more money from the insurance company after surrendering your life insurance policy than you paid in premiums, some of that money is considered regular income by the IRS.

For example, if the cash value of your life insurance policy is $14,000 and the insurance company takes $2,500 in surrender fees, you’ll receive $11,500. If you’ve paid $10,500 to the insurance company in premiums over the years, you’ll pay taxes on only $1,000 of the money you received. The IRS considers the other $10,500 a return of premium, which isn’t taxed as income.3

Alternatives to Surrendering Your Life Insurance Policy

Many life insurance policy owners aren’t aware that they have choices when it comes to their life insurance policy. Your life insurance policy is your legal property, just like anything else you own. You have the right to keep your policy and the death benefit, surrender your policy and claim the cash value, use the cash value to pay the policy’s premiums, or sell the policy through a life settlement if you are eligible and are satisfied with the terms of the settlement.

Find Another Source of Money and Keep Your Life Insurance

If you need access to cash but your beneficiaries also need the death benefit provided by your life insurance policy, it’s smart to consider other ways to raise the money. If you need funds to cover outstanding medical bills, don’t create secured debt. Medical bills can eventually hurt your credit, but since they are an unsecured debt, there’s nothing for a medical provider or collection agency to repossess. If you take out a second mortgage to pay off medical bills and then default on your payments, you could enter foreclosure and lose your home.

Take Out A Policy Loan

Depending on the insurance company’s rules and how much money you have in the cash value portion of your life insurance policy, you may be able to take out a loan against your policy’s value.

Since there aren’t any underwriting requirements for a policy loan, it doesn’t matter if you have bad credit. While you will pay interest on the loan, it’s typically less than interest rates on a regular personal loan.

Make A Direct Withdrawal From Your Life Insurance Policy

If you have more cash value than required to meet your immediate financial needs and you’d like to keep your life insurance policy in force, talk with your insurance company about making a direct withdrawal from the policy.

The death benefit is reduced dollar-for-dollar by the amount of money you withdraw. You don’t have to pay back the money, though. The death benefit may be less, but it will still be in place for your beneficiaries. Expect to keep paying your regular life insurance premium, even after you make a withdrawal from the policy.4

Sell Your Life Insurance Policy

Americans over the age of 65 forfeit more than $112 billion in life insurance benefits each year by surrendering or lapsing their life insurance policies.5 One way to get some of that money back is to sell your policy through a life settlement. In general, life settlements work best when the insured person is over the age of 65.

While the average cash surrender value paid on a life insurance policy is just 10% of the death benefit, a life settlement offers policy owners an average of 20% of the policy’s death benefit.6

When you sell your life insurance through a life settlement, a group of investors buys the policy for a portion of the death benefit. They take over payment of the premiums, and when you die, the investors receive the death benefit.

You may be able to sell your life insurance policy in a viatical settlement no matter your age if you’ve been diagnosed by a doctor with a serious illness and have a life expectancy of fewer than two years.7 Terminally ill life insurance owners may consider surrendering their life insurance policy if they need quick access to cash. Like life settlements designed for older people, viatical settlements provide the policy owner with more money than cashing in a life insurance policy.

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Frequently Asked Questions About Surrendering Your Life Insurance Policy

How does the life insurance company calculate cash surrender value?

If your policy is 10 to 15 years old, you may have enough money in the savings portion of the policy to surrender it and ask for the money. Your surrender value is the amount of money in the savings portion of your policy, minus the insurance company's surrender fees.  During the first few years you own the policy, you'll pay hefty administrative fees to the insurance company. Since those fees are taken directly from your premiums, the policy's cash value may grow slowly at first. It doesn't usually make sense to surrender a policy that's only been in force for a few years. If you still owe administrative fees when you initiate the process of surrendering your policy, those fees come directly out of the cash value.  Even after you've paid the insurance company's administrative fees and the cash value of your policy begins to grow, you are still subject to surrender fees if you decide to terminate the policy. The insurance company takes those fees directly out of the cash value before they send you the money.  If you've taken loans against your policy and they remain outstanding, the insurance company will also take that money from your policy's cash value.   So, you'll receive the cash value of your life insurance policy, minus outstanding loans, administrative fees, and surrender charges when you surrender your whole life insurance policy back to the company. 

How can I get life insurance policy surrender charges waived?

You may be able to avoid hefty surrender charges if you let your insurance company know that you are thinking about surrendering your policy. Ask if they have a policy that allows them to reduce or eliminate surrender fees if you continue to pay your premiums for a certain amount of time after notifying them of your intent to cancel the policy.8

What's the difference between a life insurance policy's cash value and its surrender value?

If you are thinking of terminating your permanent life insurance policy, you may be confused about some of the common terms used by the life insurance company. The surrender value and the cash value of your policy are not the same. Your policy's cash value is the money that accrues inside of the investment portion of your life insurance policy. Life insurance surrender value is your policy's cash value minus the life insurance company's surrender fees. Life insurance companies charge surrender fees if you terminate your policy early. This helps them recoup some of the costs of initiating your policy. It also discourages policyholders from canceling their coverage. The longer you have your policy, the smaller the surrender charges. So, if you've had the same permanent life insurance policy for decades, your surrender value and cash value may be the same.9 Surrendering your life insurance policy makes sense in some situations. However, if you can avoid this often-expensive way to access extra money, you have many options to help you avoid paying surrender fees and administrative fees. In some cases, you may be able to keep your policy in force for your beneficiaries or get much more money by selling your policy through a life settlement.

1  “Consumer Advisors – LISA – Life Insurance Settlement Association.” Accessed 13 Mar. 2021.

2 “What is a tax-free 1035 Exchange? | Investopedia.” Accessed 13 Mar. 2021.

3 “Life Insurance & Disability Insurance Proceeds | Internal … – IRS.” 14 Oct. 2020, Accessed 14 Mar. 2021.

4 “Can I Withdraw Money From My Life Insurance? – Experian.” 10 Dec. 2020, Accessed 14 Mar. 2021.

5 “Consumer Advisors – LISA – Life Insurance Settlement Association.” Accessed 13 Mar. 2021.

6  “Consumer Advisors – LISA – Life Insurance Settlement Association.” Accessed 13 Mar. 2021.

7 “Viatical Settlement Definition – Investopedia.” 19 Feb. 2021, Accessed 14 Mar. 2021.

8 “Surrender Charge Explained – Investopedia.” 3 Sep. 2020, Accessed 14 Mar. 2021.

9 “Life Insurance Cash Value vs. Surrender Value … – Investopedia.” 20 Aug. 2020, Accessed 13 Mar. 2021.

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