Should You Surrender Your Life Insurance Policy? Here’s What Most People Regret Not Knowing

Life insurance is normally a silent supporter in a financial scheme – it’s not explicitly mentioned, yet it gives you a feeling of secure calm. What if, however, your circumstances changed? Might The increase in living costs, loss of job or retirement adjustment make you ask: Should I terminate my life insurance policy by myself?

At first, it may appear as if it were the quickest way to get hold of cash or to reduce your monthly costs. However, a decision to surrender your policy is a final choice. Once you opt out, the securities are there no more – in most cases, for good.

Most people don’t realize the full extent of the trade-off. Here, we will clarify those points, risks, and safer options that might keep your finances and family safe.

But before Do you know also what is your whole life insurance calculation?

What Is the Actual Meaning of Life Insurance Policy Surrender?

By early policy surrender, you are requesting the current insurer to pay out the cash surrender value to the owner of the policy – the amount the policyholder had built up in the policy after the costs are deducted.

Such an action is limited to permanent life insurance, like as follows:

• Whole life.
• Universal life.
• Indexed universal life.

Term life insurance is such that if you cancel your policy no payout will usually be given.

With permanent life insurance, the cash value will increase over time. If you decide to relinquish your policy prematurely – in most cases within the first 10 to 15 years – chances are that your policy hasn’t grown considerably. What is more, surrender fees will reduce your payout, at least partially.

Moreover, if the sum that you receive is higher than the total amount of premiums you have paid, this surplus will be treated as taxable income.

Many insurance companies’ clients are shocked at the small amount refunded to them and become even more astonished when they receive a tax invoice.

In case you have doubts about the computation of the surrender value, our explanation of the life insurance surrender value might be of help.

Common Reasons People Consider Surrendering

Most people don’t choose to give up their policy without much thought. Following are the major reasons for such a decision:

You Need Immediate Cash

Emergency situations are sometimes causes for surrendering temptation. Medical bills, home repairs, or job loss, for instance, may lead to such a choice. It’s one of the few methods to have money handy fast without borrowing.

You Think You Don’t Need Coverage Anymore

Perhaps your house is paid for. Your children are self-sufficient. You believe that financially your family is not reliant on you anymore. Nevertheless, it is still reasonable to consider the idea that insurance might help you in your retirement years or in your will planning.

Your Policy Isn’t Performing

Several policies promise money value growth projections that turn out to be infeasible. If a cash value in your policy is increasing at a slow rate or you have more premiums than you expected, you may become so frustrated that quitting may seem the only option.

But Here’s What You Could Be Giving Up

Before you escape from your policy, it is essential to acknowledge what you might be losing:

You Lose Lifetime Protection

Once you let go, you do not have the guaranteed death benefit. In case you get sick and you want to get insurance again, you may not qualify or it may be too expensive.

Surrender Charges Eat Your Cash

The majority of permanent policies are accompanied by a surrender charge schedule. In the initial years, these fees can take a big part of your payout — sometimes they can be so high that what remains is less than you have paid in.

You Might Be Required to Pay Taxes

The IRS might tax your policy if it has increased in value. Let’s say you have paid $25,000 of premiums and the surrender value is $40,000, then the $15,000 difference is likely to be taxed as ordinary income.

You Break Your Inheritance Plans

Basically, a lot of people count on a life insurance policy as part of their estate plan in order to pass on a tax-free lump sum to their family. Once you give up the policy, you not only get rid of that financial safety net but also make it your future self’s problem – the one who might regret losing it.

When Surrendering Might Be the Right Decision

Truth be told, a life insurance policy isn’t a lifetime necessity for everyone. Moreover, there are certain cases when giving up the policy would be a wise decision, such as:

• You’re single, and death won’t cause financial trouble to anybody.
• Not only your retirement accounts are perfectly funded, but the life insurance policy also stagnant.
• You’ve already had life security in many forms, such as annuities or long-term care insurance.
• You are so desperate for money that you have already rattled through all the alternatives.

Still, you should take a look at the other options that can be considered before making the decision to surrender the life insurance policy. Our topical guide about it here is all about that.

Smarter Alternatives Most People Overlook

Before you take the drastic step of canceling the policy, you should think over these possibilities.

1. Reduce the Death Benefit

Contact your insurer and ask to decrease the amount of the death benefit if your premiums are too high. This option will make your premiums lower, but your coverage will still be there.

2. Convert to a Paid-Up Policy

Some policies, with the accumulation of sufficient cash surrender value, provide the option to cease premium payments and retain a smaller, fully paid-up policy for life.

3. Take a Policy Loan

In place of a surrender, you may be allowed to take a loan from your cash value. Such loans usually have a low interest rate and do not require credit checks. However, please be sure to repay it, or it may reduce your death benefit.

We discuss in detail this approach in our article on policy loans vs partial surrender topic.

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4. Sell the Policy Through a Life Settlement

It might be a better idea to sell your policy in the life settlement market to get a bigger payout if you are an elderly person. Compared to surrendering, a life sale has the potential to raise profits by tens of thousands of dollars.

We explain how this is done legally in our article: how to sell your life insurance policy.

Questions to Ask Before You Surrender

Before you send the paperwork, spend 10 minutes with these questions:

• Have I really looked into other ways to manage my money?
• Do I fully understand the charges and tax consequences?
• Will I require life insurance in the future, particularly if my health takes a turn for the worse?
• How much is the policy worth for my estate or retirement plan?
• Have I consulted a fee-only financial advisor?

Most bad choices are the result of insufficient information. Take time to evaluate your options.

Real-Life Case Study: What One Family Lost

Karen a 61 years old retired teacher from Colorado, sold her universal life policy for $12,500 – with the intention to settle some credit card debts. After two years, her husband passed away unexpectedly.

That policy could have given her $150,000 tax-free.

On the other hand, she was left empty without a safety cushion. “I wasn’t even aware that there was another way,” she said to her financial advisor later. “I believed that I was only ridding myself of an expense.”

A short-term fix should not be the cause of a long-term regret.

Don’t Cancel What You Don’t Fully Understand

Selling your life insurance policy will get you instant cash — but it could be a very expensive decision for the future.

You might:

• Be cut out from new insurance plans
• Unexpectedly have to cover tax bills
• Your heritage and retirement plan could be compromised

Before you take the final step, first think about reducing your coverage, taking a policy loan, or delving into the life settlements. These routes might get you what you want without letting go of all that you have built.

Don’t rush, consult with a financial expert, and keep safe what is the most important both for now and the future.