What It Means to Surrender a Life Insurance Policy—and How to Know If It’s Right for You

There are times when you might be looking for places to free up some cash, like if you’ve recently lost a job, or life gets unexpectedly more expensive (medical bills, car repairs, inflation … the list goes on).

If you have a permanent life insurance policy that has a cash value, like whole life insurance or universal life insurance, you might consider surrendering your policy as a source of liquid funds. But that’s a decision that shouldn’t be taken lightly, as it can’t be undone.

Before you start making moves, here’s everything you need to know about surrendering your life insurance policy.

What Does Surrendering a Life Insurance Policy Mean?

Essentially, surrendering a life insurance policy means that you’re canceling it. You will no longer owe premiums and if you pass away, your beneficiary will not receive a death benefit payment.

Discussions about surrendering a life insurance policy typically only refer to permanent life insurance policies. While you can surrender a term life insurance policy, you won’t receive any money in return, since the policy has no cash value. You’ll simply forfeit the premiums you’ve already paid and will no longer have life insurance coverage.

Why Would I Surrender My Life Insurance Policy?

The main reason people consider surrendering their life insurance policies is to access the cash value amount that has accumulated in the policy over time. The cash value should not be confused with the death benefit amount that your beneficiary would receive if you were to pass away while the policy is active—that’s a different number altogether.

Each time you pay a premium for a permanent policy, the cash value of the policy goes up. If the funds in the policy are invested, the cash value may also increase through dividends or interest payments. Taxes on these earnings are deferred as they grow. 

If you’ve had a policy for a significant amount of time, especially if you haven’t withdrawn money from the cash value or taken loans out against it, the cash value may grow to a sizable sum. If you need cash, withdrawing all of that cash value may be tempting.

However, the amount you’ll receive if you surrender your policy is often lower than the cash value amount — sometimes substantially so.

The Difference Between Cash Value and Surrender Value

Your policy’s cash value builds up over time as you pay premiums and collect interest and/or dividends. You can find out the cash value of your policy by logging into your insurer’s website or calling customer service.

What you’ll actually receive when you withdraw all the cash value from your policy and terminate it is known as the surrender value. The surrender value is typically the cash value that remains in your policy minus cancellation and other fees that your insurer may charge for terminating your policy early.

Is Surrendering a Life Insurance Policy Ever a Good Idea?

There are a few reasons why surrendering a life insurance policy may not be the soundest financial choice.

First of all, your loved ones will be left without a cushion once you surrender the policy. If you have people who rely on you financially, you may not want to surrender your policy unless you’re planning to immediately replace it with a more affordable term policy.

Second, since the insurance company wants your continued business, they don’t exactly make it easy to surrender your policy. According to Coverage.com, surrender fees may total between 10% and 30% of the total cash value. You’ll be responsible for any early termination fees stated in your policy documents, as well as any taxes you may owe on the earnings you withdraw from the policy. (In some cases, surrender fees no longer apply after a certain number of years, so check your policy paperwork for details.)

Finally, if you purchased the policy relatively recently, it may not have much cash value anyway. So if you need cash, surrendering your policy may not be the solution you’re hoping for.

However, there are some situations where it may make sense to surrender your policy. For instance, if you no longer have anyone that depends on you financially who would need the death benefit if you were to pass away, surrendering your policy would allow you to invest the surrender value somewhere else.

Other Ways to Get Cash From Your Whole Life Policy

Tapping into your cash value can decrease the size of the death benefit your loved ones would receive if you passed away, but you can use a portion of it while you are still alive. One of the main benefits of having a permanent policy is that you can draw on the cash value when you need it.

If you decide that surrendering your policy may not be the right move for you, there are a few other ways that you can get cash out of your policy.

Withdrawal 

Typically, you can withdraw as much as you’ve paid in premiums without penalty or taxes. If you withdraw some or all of the investment earnings from the policy, you’ll owe taxes on it at your ordinary income rate.

One thing to keep in mind is that withdrawals from your policy’s cash value can reduce the death benefit your beneficiary would receive if you were to pass away. Depending on the terms of your individual policy, your death benefit may even decrease by more than the amount you withdraw.

Loans

You can take out a tax-free loan against the cash value your policy has built up over time. While the loan may garner interest, you are not required to make payments on it like you are with a typical loan. That said, the loan amount and interest will be deducted from the death benefit if you pass away while it’s still outstanding.

Life settlement

If you’re sure that you want to get rid of your policy altogether, you can look into selling it to a life settlement organization. Typically, a life settlement offers to pay a price somewhere between the surrender value and the death benefit of the policy. This option requires deep understanding of your existing policy’s terms to make sure the sale is actually a better deal than surrendering your policy—life settlements come with fees of their own. Shop around and only use licensed brokers if you choose this route.

If you’re considering surrendering your life insurance policy, make sure that you understand the policy terms and your loved ones’ financial needs and expectations before you make your final decision. After all, they’re the reason you bought the policy in the first place.

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