If you have a life insurance policy, it can sometimes make sense to surrender it early. Here are some of the common situations where you might want to.
You need the cash.
One common feature of a whole life insurance policy is that it can also act as a savings account. The longer you hold the policy, the bigger its cash surrender value gets.
The cash surrender value is the amount you can take out today in exchange for giving up or lowering your future life insurance policy.
Keep in mind that the cash surrender value of life insurance is taxable by the IRS. When deciding if cashing in your life insurance is worth it, you need to calculate taxes. This can be complicated since your taxes are reduced by how much you paid into the policy.
You no need longer the policy.
There are often circumstances where you may no longer need life insurance. Maybe you had it to pay off your mortgage, and you already paid it off. Maybe you’ve been able to save enough money to support your family.
If you no longer want to carry life insurance, it might make sense to surrender it and take the cash. If you don’t need the cash and the premiums aren’t that high, you might want to keep the policy to help your family’s future.
You found cheaper coverage.
Another situation you might find yourself in is if you found cheaper coverage. This isn’t always possible since rates generally go up as you get older, but it can happen. You might have been overcharged, or you might have new access to a discounted policy such as through your employer.
If you’ve done the math and can get the same coverage for cheaper, you might want to cash out the old policy so you don’t have to continue paying premiums on it.
When can you surrender your life insurance policy?
When you can surrender your life insurance policy depends on the terms of the policy. Policies usually have a minimum holding period that’s often several years.
After the holding period, you can almost always cash the policy in when you want. It may take a few weeks to submit the paperwork and wait for your insurance company to process it.
Keep in mind that you can usually only surrender whole life policies. Term life policies generally don’t have a cash surrender value. Ending a term life policy early generally only keeps you from having to pay future premiums.
Can you make a partial withdrawal or surrender?
Partial withdrawals also depend on your specific policy terms. You may or may not be allowed to make a partial withdrawal, and there may be a limit on how much you can withdraw.
Partial withdrawals work similarly to surrenders. This includes being subject to income tax.
Can you sell your life insurance policy?
Another option you may have is to sell your life insurance policy instead of surrendering it. When you sell your life insurance policy, you receive cash today, and the investment company receives the future benefits on the policy.
The amount you can receive when you sell your life insurance policy is often higher than your cash surrender value but not as much as the full benefits. If you do sell the policy, you generally can’t continue to build up a cash surrender value, aren’t entitled to surrender it in the future, and your beneficiaries aren’t entitled to any future benefits.
Talk to a financial advisor.
Surrendering a life insurance policy is an important financial decision that can have major consequences for you and your beneficiaries. You may want to talk to a financial advisor before making a decision.
When choosing a financial advisor, make sure they can explain the implications for both taxes and your family’s future financial needs.