There are many reasons why insurance policy owners may be considering a surrender of their policy. Emergencies that require immediate liquidity or budget constraints that may make keeping the policy difficult are reasons that usually require people to consider surrendering a policy. If you are considering a policy surrender, knowing the implications and alternatives you may have will help you make decisions that will better serve your present and future financial goals.
Covered in this article:
Beyond surrenders: Alternatives to cashing out your policy to preserve future security
Maximizing policy value: Strategies to get the most value from your policy surrender
Avoid consequences: how to prevent coverage loss and tax implication risks
General terms and conditions for exercising surrender rights
The policyholder’s ability to exercise surrender rights is dictated by the terms and conditions of the policy and will generally include the following:
Surrender period. There is typically a minimum amount of time that must pass before the policyholder can surrender the policy.
Surrender charges. Insurance companies will have fees associated with early termination of a policy. The fees decrease the longer you have the policy and, at some point, may even disappear altogether.
Surrender value calculation. Calculating the total surrender value of a policy is usually straightforward; the result is often the cash value minus fees, outstanding loans, and past-due premiums.
To make the most of your policy surrender value, being familiar with all the terms and conditions involved is beneficial. It may also be helpful to consult with an insurance professional if there is any doubt about any policy stipulations.
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Implications of surrendering a life insurance policy
When surrendering a life insurance policy, you should anticipate the following changes:
Coverage will terminate. The first major event to consider is the loss of coverage. Your beneficiaries will lose any potential benefits and protection they would otherwise receive.
Receipt of surrender value. Once the policy is surrendered, you will receive the surrender value, which will likely be lower than the current cash value if the surrender happens within the first 10 years of the policy.
Financial repercussions. When surrendering a policy, you may want to consider that a portion of the cash you receive may be taxable as ordinary income. You may also want to consider the impact of not having life insurance on your long-term financial planning.
If you are considering surrendering your policy, the following checklist may be helpful in making the best decision possible.
- Evaluate financial needs. Decide if your reason for surrendering the policy is temporary or permanent
- Review the policy details. Check your policy type (whole, term, universal, etc.) to see how the surrender options are affected.
- Assess surrender fees. Check the surrender charges and decide if surrendering your policy now is a good idea. It may pay to wait if you can, and surrender charges decrease within a reasonable amount of time.
- Calculate the final surrender value. Check your policy carefully and calculate the final amount you would receive by surrendering. Decide if the final amount takes care of your needs.
- Understand tax ramifications. Taxes may take a significant portion of your surrender value, make sure you allow for them.
- Consider alternatives to surrendering. Surrendering a policy is a step you can not undo and the implications may be serious. Looking into options such as loans and life settlements may be a better option for you.
- Speak to a professional. Reaching out to an experienced professional is always prudent. Life insurance, settlements, and tax ramifications are a lot to handle on your own if this is not something you deal with regularly.
Following this short checklist can improve your chances of having the most beneficial outcome when you surrender your policy.
Life insurance surrender options
The table below explains your surrender options as well as the financial impact, tax implications, and eligibility of each. As you consider surrendering your policy, keep in mind that you do have other options. Your individual needs will dictate what is going to give you the most benefit.
|Surrender charges: surrender value may be less than the cash value
|Surrender value may be partially taxable
|Policy must have cash surrender value: must meet surrender period requirements
|Potentially receive a higher amount than surrendering
|Proceeds may be taxable
|Typically available for seniors or individuals with a 10–15-year life expectancy
|Cash value withdrawals
|Cash value reduced by withdrawal amount: no repayment needed
|Withdrawals are tax-free up to the amount of premiums paid
|The policy terms must allow for withdrawals: must have sufficient cash value
|Will reduce the policy’s cash value: not required to repay, but unpaid loans will reduce the death benefit
|Loans are not taxable unless the policy lapses
|The policy must have a cash value: loan terms vary with policy types
Tips for surrendering your policy
Carrying out a policy surrender may be somewhat involved. Here are some tips to follow if you do decide to go that route:
Understand the surrender schedule
Familiarize yourself with the terms and conditions of the surrender schedule. You may be able to save if you wait long enough to reduce the fees or eliminate them altogether.
Negotiate with the insurance company
Talk with your insurance company and try to negotiate the fees. Explain any extenuating circumstance you may have that may convince them to give you a break on the fees.
Consider the tax implications
Consider how a surrender will affect your tax liability. The timing may be particularly important as it may even put you in a higher tax bracket.
Maximize the policy’s value
To get the most out of your policy, review the numbers carefully. Be sure any dividends and bonuses are added to the value before surrendering. Make sure to pay any unpaid premiums to avoid penalties that would further reduce the total amount of cash you receive.
Get professional help
The life insurance business is very expansive, and you may benefit from consulting with an experienced professional who can guide you through this process. They may help you find other solutions to your needs that may benefit you in the long term.
Document all communication
With so much that you will need to discuss and the many people you may need to speak with, keeping track of your conversations with names, dates, and details is a good policy.
By following these suggestions, you can manage the surrender process with more clarity and less stress and make the most of your policy surrender.
Surrendering a life insurance policy is an important decision that significantly impacts your financial future. Understanding the terms and conditions of policy surrender rights is a fundamental step toward making the right decision. Knowing your options other than surrendering your policy may put you in a better financial position. Finally, if a policy surrender is the only option available, knowing how to make the best of it will give you peace of mind.
When you surrender a policy, you terminate life insurance coverage, which may jeopardize the security of your beneficiaries. Surrendering also means you will get a reduced amount compared to the premiums paid and the policy's cash value.
Your surrender rights are provided as part of your insurance policy terms and conditions. There is typically a surrender minimum period and fees associated with the surrender. Make sure to read those terms carefully.
There is considerable financial impact when surrendering a policy. The proceeds may be taxable, and the loss of coverage for your beneficiaries is to be considered when surrendering a policy.
Is it possible for surrender fees to be waived or negotiated?
There are cases when insurance companies may consider a reduction in surrender fees. For example, financial hardship. It is worth having that conversation with your insurance company. You may also find that the timing may avoid some of those fees.
How does surrendering a policy affect my future insurability?
Surrendering a policy does not affect future insurability. However, remember that your health may change, and your age will also impact new insurance options. Either of these events will lead to higher premiums in the future.
Can I partially surrender my life insurance policy?
When surrendering a policy, partial surrender is not an option; you can only do full policy surrenders. You may want to consider a policy loan or a withdrawal if that’s available on your policy, and these options accomplish your objective.
- Life Settlement Advisors. What happens when you surrender a life insurance policy?
- Cornell Law School. Surrender value.
- Broadridge Advisor Solutions. Surrendering your life insurance policy.