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Surrendering your life insurance policy

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Life insurance policies are an essential part of planning for your future and are relatively easy to obtain if you are in good health. They provide a nice layer of protection for loved ones if you die, but they do come with strings attached. For various reasons, you may decide it is financially in your best interest to surrender your life insurance. In this article, we’ll explore the ins and outs of doing so, and what important considerations you should keep in mind.

What does it mean to surrender your life insurance?

Simply put, to surrender life insurance is to opt out of or cancel your policy. The process can be relatively simple, depending on the type of policy you have and whether or not it has a cash value or investment aspect. At the core, this surrender will involve notifying your provider, filling out necessary paperwork and the subsequent cancelation of your policy. 

How does my type of life insurance affect surrendering it?

Depending on the type of life insurance policy in question, surrendering it may be nothing more than a cancellation, or it may also include a cash payout. Only those policies which contain an investment or cash value component will provide a payment. Most universal and whole life insurance policies have a cash surrender value, but term life policies do not. This payment isn’t an insurance payout, but rather the company giving you your accrued investment money when you choose to close your account.

Term life

Term life insurance policies do not have an investment portion. When you surrender your term life policy, the company will cancel your plan but you will not receive a payment.

Whole life

Can I cancel a whole life policy? Yes, you can. When you cancel whole life insurance, you gain the full amount of your investment, minus fees. During the life of your plan, roughly one-third of your premiums go into this investment fund. Upon surrendering, the insurance company will take anywhere from 10% to 30% in fees. What’s left after that is returned directly to the policyholder. Whole life investments are generally placed into high-interest bank accounts or investment accounts with minimal risk, so a return is more likely to be significant.

Universal life

Universal life insurance policies have a cash value component. When you surrender one of these policies, you will be given the sum of your investment account minus any surrender fees that the insurance company has. Universal life investments are generally placed in market-dependent investment accounts. These accounts have both higher risk and higher potential gains than whole life investments, which means your payout amount is not guaranteed to accumulate and be valued at a set rate each year.

Who should surrender their life insurance?

People who no longer need their life insurance policy, or who have immediate financial needs, should consider surrendering it. Depending on the circumstances, surrendering your life insurance policy can be helpful. But if you still need a life insurance policy and you don’t have a replacement policy lined up, you should not surrender it. 

Why surrender your life insurance policy?

There are a handful of reasons to surrender your life insurance. Perhaps you switched jobs, and your new employer offers quality life insurance for cheaper than what you’re currently paying. Or maybe you no longer have beneficiaries who need the death benefit, and you’re tired of paying the premiums. The third common reason for surrendering life insurance is to gain the cash surrender value of your policy. This final reason only works with life insurance policies that have a cash value factor built in.

The first example of switching jobs is an excellent reason to surrender a policy. If you have access to an equivalent or better life insurance policy for a lower price, there’s no reason to keep your policy. The second example of no longer wanting the death benefit is another good reason to surrender a policy. You won’t be able to spend your own death benefit, and if no one else needs it, you could potentially make better use of it.

The third example is more of a gray zone. Surrendering your policy purely to obtain the cash surrender value can be a bad idea. Life settlements can net more money, while policy loans can provide immediate cash without canceling your life insurance. If you could still benefit from your life insurance policy, then surrendering it purely for the cash surrender value may not be your best option.

When can you surrender your life insurance policy?

Policies with cash value—most types of permanent life insurance—have some rules about when you can surrender them. Most of these policies will have both surrender periods and surrender fees. Surrender fees are charges taken from the cash value of your plan upon surrendering it. Surrender periods are discussed in detail below, but relate to how long a policy must be active before it can be surrendered.

The longer a policy is active and the more premiums that are paid into it, the larger its cash value will be. So, not only do many plans require that you hold them for a set amount of time before surrendering them, but they are also worth more the longer you keep them active.

Surrender periods

Surrender periods apply to those life insurance policies with a cash value component. With these policies, there is an initial period that must pass before the plan can be surrendered for its cash value — often ten to fifteen years.

While the surrender period is meant to prevent premature surrender, that can still be accomplished if the policyholder decides. However, if a policy is surrendered during this time, there will usually be very high fees associated with it. The closer to the end of the surrender period you are, the lower those fees will be.

“In force”

“In force” is simply an industry way of saying that a policy is active. This means that the premiums are being paid, and the coverage is present. A plan goes into force once it is initiated, and the first premiums have been paid. A policy is no longer in force once it has been surrendered, canceled or otherwise expired (as term life insurance does). 

The longer a policy is in force, the greater the number of premiums that have been paid into it. With cash value policies, this will contribute to a greater cash value. Being in force for longer will also lead to lower surrender fees on these types of policies.

How to surrender your life insurance

Although steps may vary slightly by provider, these are the typical steps you’ll take to surrender your life insurance policy:

  • Contact your insurance agent and notify them that you would like to surrender your policy. Alternatively, you can visit your insurance company agent in person for this step. They will provide you with a surrender form to fill out and return. These forms can be given in person, sent via mail or even downloaded digitally.
  • Fill out the surrender form and make a copy for personal recordkeeping. This form is your legal permission and request to the company specifying that you wish to surrender your policy. The duplicate is for your records in case there are any mishaps down the line.
  • Mail the form to your insurance company and store the receipt of mail with your copy of the surrender form. These documentations ensure that you have proof that you completed and mailed the form.
  • Confirm that they have received your form once the letter is likely to have been delivered. This call is mostly to keep your policy surrender towards the top of your agent’s to-do list but can also save some time if something went wrong in the mail and they didn’t receive your form.
  • Wait and collect. At this point, there shouldn’t be anything else required of you except for receiving and depositing a check. In some cases, your insurance company may be able to make direct deposits instead.

The takeaway

  • Surrendering your life insurance is a cancellation of the policy.
  • Permanent life insurance policies have a cash value component that can be withdrawn by surrendering the policy.
  • Surrender periods discourage early surrendering of policies through high surrender fees.
  • People should consider surrendering their life insurance if they no longer need it, or can no longer afford it.
  • To initiate the policy surrender process, call your insurance agent and request a surrender form.

All life insurance policies can be surrendered, but only certain ones will come with a cash value. Whole life and universal life policies have investment components that are paid out upon completion or surrender of the plan. Before surrendering any policy, think about what other life insurance options you need to have in place, and consider all fees and other implications prior to initiating the process.

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