Cash Surrender Value: How To Get The Most Out Of Your Life Insurance
There are various reasons you might find yourself short on cash – perhaps you had a medical emergency or you maybe you’ve suddenly found yourself out of work. No matter the reason, when financial difficulties strike, you always have the option of terminating your existing life insurance policy in exchange for money.
In this guide, we'll talk about how to trade in your life insurance policy for cash. We'll also outline how much money you can expect to receive and the fees you'll need to pay. By the end, you should know if this is the right step to take for your future.
Can You Surrender Your Life Insurance For Cash?
If you're in need of quick cash, you can surrender your permanent life insurance policy for cash. This means that you're asking the insurance company to cancel your coverage in exchange for the policy's surrender value.
Once you surrender your life insurance policy, your dependents will no longer get a death benefit if you pass away. For that reason, it's always good to consider other options before resorting to surrendering your life insurance coverage. These options include borrowing money from your life insurance, taking out personal loans, or claiming an accelerated death benefit (prematurely withdrawing part of your death benefit).
As a policyholder, it's also possible for you to make a partial surrender, which means withdrawing funds from the face value. Your dependents will no longer receive the amount you've withdrawn from the policy, but they'll receive what remains of your coverage.
Note that you only have this option for permanent life insurance (whole life insurance) and not for term life insurance. That's because term life insurance policies don't accumulate cash value. If you're an annuity contract owner, you also have the option to cash in your contract.
Despite the downsides, it's completely understandable for you to want to surrender your life insurance policy in exchange for cash. It adds flexibility to the policy and you can use the money to pay off high-interest debt or to cover your daily living expenses.
Cash Value vs Surrender Value
The cash value refers to the amount of money deposited in the life insurance policy. This comes from the monthly or annual premiums you pay to prevent a policy lapse. On the other hand, the cash surrender value refers to the cash value minus how much you'll pay in surrender fees.
Your life insurance company will invest the cash value of your policy in different ways, depending on the type of insurance you have. For example, the life insurance company will invest money from variable universal life insurance policies to different sub-accounts that function like mutual funds. On the other hand, they can invest money from a traditional whole life insurance policy by putting it in a high-interest savings account.
Over time, the cash value of your life insurance policy will grow. This is partly because of the premiums you've paid, but mostly because of the interest it earns from investments. Any interest your policy has earned will be taxable if you withdraw the cash value.
Surrendering Your Policy vs Borrowing From Your Policy
Instead of surrendering your permanent life insurance policy, you can take a loan against the policy's cash value. If you go with this option, you won't need to cancel your whole life insurance coverage.
Since the loan will be taken from the cash value portion of your policy, it has no initial effect on the insurance's death benefit. However, the money you owe will be subtracted from the benefit if you don't pay it back before you pass away.
Another advantage of this option is that the loan amount won't be included in your taxable income. It also won't be included in any of your credit reports.
Surrendering Your Policy vs Selling Your Policy For A Life Settlement
Getting a life settlement means selling your existing policy to a third-party company for a one-time payment. The money you'll receive from the buyer is usually more than the surrender cash value, but still lower than the policy's face value. By selling your policy, the buyer becomes the beneficiary and will claim the death benefit after you pass away.
Selling your policy for a life settlement is one option you may want to consider before surrendering because you'll get more money upfront – and either way, your beneficiaries will lose the right to claim a benefit once you die.
Do You Have To Pay Surrender Fees For Life Insurance?
To discourage people from surrendering their permanent life insurance policy, insurance companies will charge policyholders for withdrawing the cash surrender value.
You can avoid paying a surrender charge by waiting for the surrender period to end. This refers to the time you'll have to wait before you can withdraw the cash surrender value for free. Most life insurance policies have a waiting period of 10 to 20 years.
What's The Cash Surrender Value Of Your Life Insurance?
You can find out the exact cash value of your policy by asking your insurance company. If you have a fairly new life insurance contract, then the value will be quite low because it hasn't had time to earn interest.
Factors that affect the cash value of your life insurance include how long your policy has been active and how much you've paid in terms of premiums. The cash value will also depend on how well your policy's investments have performed.
When you're shopping for a life insurance policy, your agent will usually present you with a projection of future cash values. This will help you determine if the life insurance policy will be a good investment in the long term.
Once you know the cash value of your life insurance policy, you can subtract the surrender fees to learn the policy cash surrender value. A withdrawal penalty may also apply.
How To Surrender Your Life Insurance
The process of surrendering your life insurance is fairly simple. Just get in touch with your insurance agent or company and inform them of your intent. They'll usually ask you to fill out a form and send it to them once you're done. After they approve the withdrawal, you'll receive an amount equal to the cash surrender value in a few business days.
Every policyholder has the right to surrender their life policies in exchange for cash. The money they'll receive depends on the cash surrender value of their insurance policy, which refers to its savings and investment portion, minus cash surrender charges.
Get in touch with Wesley Insurance, LLC if you want to learn more about the cash value feature of insurance policies. We'll also educate you on how these policies can be used as tools for investment.