Life insurance can be a valuable tool. However, there are times when you would like to waive your premiums and get some money back. Some insurance policies, although not all, offer this option. All types of insurance policies, including universal, whole, permanent, variable, and permanent life insurances, have cash value components. This means that you can cancel your policy to get your money back. Term life insurance doesn’t offer a cash-value option.
It is important to know what the cash surrender price of life insurance is before you give up your policy.
What is cash surrender value?
The cash surrender value is how much money your insurance provider would pay you if your policy was cancelled or surrendered.
Cash value can be a part of a whole-life policy or other types of permanent insurance. Your insurance provider will take a portion from your premiums and put it into a cash-value account. This account can then grow. The cash value component of your policy will depend on the type. It may move with subaccounts or rely on company calculations. Or it might grow at the current standard rate.
You get the cash value of any investments you made in your life insurance policy if you decide to end it. This component is not available in term life insurance policies, as we have already mentioned.
What is the cash surrender value?
The cash surrender value depends on which type of life insurance policy you have. There are a few ways to determine this value. Variable life policies have the investment’s value fluctuating with sub-accounts. The insurance company determines the rate at which a whole-life policy’s value will grow. Universal life policies grow at the industry-standard rate. This table explains how cash surrender value is calculated in greater detail.
- Account Duration: Your account’s duration plays the largest role in your cash value. It reflects how long you have been investing and how long you have been contributing to it.
- The amount paid: Your premiums make up the investment capital for the cash value portion of your life insurance policy. As such, the greater your investment, the higher you pay.
- Market performance When your investment is tied directly to the market, market performance becomes a dominant factor. Your investment might also perform well if the market is performing well.
You must complete the surrender period before you can access your cash surrender value. You must wait a certain amount of time before you can access your policy’s cash value. The waiting period depends on the type of policy and insurance company.
What are surrender fees?
When you claim your cash surrender value for life insurance, most companies charge surrender fees. These fees tend to be higher for older policies, and decrease with time. The surrender fees can vary greatly between policies and depend on the policy’s age and duration. Surrender fees are typically between 10 percent and 35 percent.
Imagine that you have a 12-year-old policy of life insurance with a cash value $7,000 and it is in your possession. For the cash value, you decide to surrender your policy. After the insurance company has adjusted for their 20 percent surrender fee, you will receive $5,600 and the company takes $1,000. The cash surrender value is the amount you get, and the initial cash value is the amount you received.
You might be subject to tax on certain cash surrender values of life insurance. You can ask your agent, your insurance company or an accountant for clarifications on the tax laws governing your life insurance policy.
Is it worth reneging on your policy?
It may be worthwhile to surrender your policy depending on your circumstances. It might be a good idea to surrender your policy if you plan on changing life insurance policies, particularly if the policy is with another company.
You might also consider giving up your policy if your job changes and you are offered free or subsidized insurance. If you have no other options, you can also surrender your policy. However, this last motivation should not be used. A personal loan might be more sensible in such circumstances. You might even be able to borrow against your life insurance policy.
It is not always a smart decision to surrender your policy. It is unlikely that you will get back all the premiums paid over the years. Cash surrender value does not constitute a refund. This is a return on your investment, taking into consideration any gains and losses.
There are alternatives to surrendering your policy
It is wise to look into other options before you decide to give up your life insurance policy. Before you give up your life insurance policy, here are some options.
Cash value can be withdrawn
You can often withdraw cash directly from your cash value. It is possible to withdraw the cash value and keep a certain amount. Remember that money taken out could be deducted from your death benefits, so your loved ones may have less when you die.
Get a loan policy
A policy loan is another way to quickly make money from your life insurance policy. These loans are secured by your life insurance policy. Your life insurance provider will deduct the amount owed from your death benefit if the loan balance is not paid in full.
Sell the policy
You might be able sell your policy if you decide to cancel it. You may be able to get more than the cash surrender value, while still getting the plan out of your hands. This is known as a life settlement.
Questions frequently asked
What is cash surrender value?
After the applicable surrender fees have been deducted, the cash surrender value is the cash value for investments made in your life insurance policy.
What is a surrender period?
Many companies require that policies remain active for a certain period before they can be surrendered to cash value. The surrender period is the waiting period.
Can I sell my policy on life insurance?
You can reach out to your insurance agent and tell them you are interested in settling your life insurance policy.
What amount will I receive if my policy is canceled?
Each policyholder will have a different cash surrender value. The cash surrender value is affected by factors such as the type and duration of the policy, the amount of money that was invested into it, and the time it has been in effect.
When is it time to cancel your life insurance policy
You should not surrender your life insurance policy if another policy is in place. Although it may seem tempting to surrender your coverage in order to get the cash surrender value, this will leave your loved ones without the financial protection your policy’s death benefit would provide in the event of your passing. Talk to an advisor or insurance agent before you decide to surrender your life insurance policy in order to access the cash surrender value.
