Surrendering Your Life Insurance Policy: Reasons and Risks

Mar 14, 2023 | Article

Surrendering is the official term for canceling your whole life insurance policy. Unlike term life insurance, which has no cash value aside from the death benefit, whole life, or permanent life insurance, builds a cash value component over time. That makes the decision to surrender your policy a complex one. Let’s examine some of the reasons you, as a policyholder, may choose to surrender your policy along with the risks involved.

Reasons to Surrender Your Life Insurance Policy

There are several possible reasons for surrendering your life insurance policy:

  • You can no longer afford to pay the insurance policy premiums. Whole life insurance premiums tend to be more expensive than term life.
  • You no longer have a reason for the policy. For instance, your young dependents may be grown and no longer need your support.
  • You’ve received a quote from another life insurance company that’s more affordable or advantageous to your situation.
  • You have an immediate need for funds and no other way to access it—healthcare expenses, major home renovations, etc. This may be the single most frequent reason life insurance policies are surrendered.

Risks of Surrendering Your Policy

  • Your whole life insurance policy has something called a cash surrender value, which is the cash value accrued minus whatever surrender charge there may be. A surrender charge is a fee insurance companies charge the policyholder to facilitate canceling the policy.
  • The cash surrender value of your policy depends largely on the size and age of your policy. Cash value builds at a slower rate early in a policy’s existence, particularly during the first ten years. That cash surrender value accelerates in later years. Coupled with that, surrender charges tend to be higher early in the life of the policy. This can greatly affect the total cash surrender amount.
  • In surrendering your policy, you’re also giving up the death benefit component of the policy, which means your beneficiaries will not receive any funds.
  • Because the cash value of your policy can be invested, it’s possible for your cash surrender value to be more than you’ve paid in premiums. If that’s the case, you’ll have to pay income taxes on the difference.
  • It’s also possible to take a loan out from your whole life insurance policy. Should you not pay that loan back before surrendering the policy, that amount will be deducted from the cash surrender value.

There’s Another Option

Rather than surrendering your life insurance policy, consider selling your policy instead. As a policyholder, you are legally permitted to sell your whole life insurance policy to a third party for a one-time cash payment, called either a life settlement or a viatical settlement, depending on your health. 

If you meet the minimum qualifications—you’re at least 65 years old (or have a terminally ill diagnosis, in which case your age doesn’t matter) and your whole life insurance policy is worth a minimum of $100,000—you’ll receive a much larger payout with a settlement than if you surrender your policy—at least four times more on average.

For example, with a settlement, you can receive between 10% and 35% of the death benefit with an average of 20%—that’s $20,000 on a $100,000 life insurance policy.

A Life Settlement Company

A licensed, reputable life settlement company can walk you through the entire process and help you decide if a life/viatical settlement is the right choice for you.

If you are interested in learning more about selling your life insurance policy rather than surrendering it, contact the experts at PolicyBank® for more information so they can help you make an informed decision.