What is surrender value of life insurance

Maybe you bought your life insurance years ago for the death benefit, but times have changed. As you navigate retirement — and life without a paycheck — you may decide to give up life insurance coverage. Doing so enables you to save by not having to pay premiums, and you may even be able to get money for your policy.

If you’re considering surrendering your life insurance policy, you should know what will happen during this process. You may be suprised to find out that you have better options, like selling your policy through a life settlement — which can result in a return that’s 4 to 11 times higher than the cash surrender value.

We’ve created this guide to explain the what happens when you surrender your policy, and why doing so isn’t your best option.

What is surrendering a life insurance policy? 

Surrendering your policy effectively cancels your life insurance immediately. Your insurer will terminate the coverage and send you a check for the policy’s cash surrender value. Cash surrender value is the balance in your policy’s cash value account, minus any surrender fees. 

Older policies generally have higher cash surrender values. There are two reasons for this. First, cash value in life insurance builds slowly at first, and picks up momentum over time. In the first 10 years of the policy, you may see little movement in your cash value balance. But after 20 or 30 years, the balance grows much faster. 

Second, surrender fees are usually high in the early years of the policy and then gradually phase out over time. On a young policy, the low cash value balance combined with high surrender fees makes for a small or even nonexistent cash surrender value. An older policy, though, should have a higher cash balance and lower surrender fees — summing to a higher cash payout when you surrender.

Can you surrender your life insurance policy?

You can surrender your life insurance policy, but whether you get money back and how much (if so) depends on several factors.

As noted, older whole life policies will typically have the highest cash surrender value while newer whole life policies will provide a minimal return. You can surrender a term life policy, but won’t get any money back since term policies do not have cash surrender value.

What happens when a policy is surrendered for cash value?

When a policy is surrendered, you’ll lose coverage and no longer be responsible for paying insurance premiums. If your policy has cash value, you’ll get this money after surrender fees have been taken into account. The money can be used as you’d like, and generally the proceeds will be tax-free as long as you’ve paid more in premiums than the amount you’ll get back.

Pros and cons of surrendering your life insurance policy 

Surrendering a life insurance policy is a life-changing decision that affects you and your family, so you should carefully the pros and cons of this option:

Pros

• Easy and fast: Surrendering your policy is an easy and fast process. Simply tell your insurance company that you’d like to surrender and let them work out the details of your policy to determine the fees you’ll have to pay and the cash surrender value you’ll get back. There’s no negotiation or middleman, the insurance company will give you an offer and you can choose to accept it and surrender, or reject and continue coverage.
• Get some money back: Surrendering your policy means you’ll get some money back, which is better than getting nothing. Some people may lapse their policy by choosing not to pay, but surrendering is a better option than this because it returns some value.

Cons

• Minimal return: Surrendering your policy means you’ll only get one offer from the insurance company, and their goal is to give you as little money as possible. On the other hand, selling a policy through a life settlement means you can present your policy to multiple buyers and get several bids which drives up the price. In fact, life settlement brokers work on commission — so their goal is to sell your policy for as much as possible which means a higher payout for you and them. For reference, selling a policy can result in a value 4 to 11 times higher than the cash surrender value. If you’re interested in finding how much you can sell your policy for, get a free estimate from Harbor Life Settlements today.
• Surrender fees: Insurance carriers often charge fees for surrendering a policy, which will come out of the cash surrender value you’d get back. These fees can be up to 10% of the proceeds you’ll get, depending on when you surrender it.
• Limited options: When surrendering a policy, the insurance company will give you a take it or leave it offer. There isn’t room to negotiate, you can either accept it or reject it. These limited options aren’t in your best interest, as you’ll find more flexibility by taking your policy to the open market where you can get several offers through a life settlement.

Should you surrender your life insurance policy?

In short, it’s not advisable to surrender a life insurance policy because selling it yields a far greater value. Surrendering a policy is essentially leaving money on the table, so if you’re considering this option — it’s at least worth looking into selling as an alternative to see how much money you could get through a life settlement. We’ve provided additional information about selling your policy below, but you can also get a free estimate or contact us to learn more. 

What does it mean to sell your policy?

The process of selling your life insurance is known as a life or viatical settlement, and it essentially involves you exchanging ownership of the death benefit to a third-party buyer for a lump cash sum. You receive a large amount of money and are no longer responsible for paying insurance premiums, and upon your eventual passing, the buyer collects the death benefit associated with your policy.

The buyer is an investor who generally has to be licensed to purchase life insurance. In most U.S. states, the sale of life insurance is a regulated transaction — which is a good thing, because it protects all parties, including you, from fraud. 

From start to finish, the sale of your life insurance can take two to four months. The starting point is connecting with a life settlement company or broker who can market your policy to multiple buyers. Assuming you’re working with a full-service life settlement partner, you don’t have to do much other than authorize the release of your medical records and then review the bids on your policy. 

In between those two steps, several things happen the scenes. For example, your life settlement team will create a package of information that’s important to prospective buyers, including longevity estimates produced by life expectancy underwriters. Your broker will reach out to a network of buyers to set up a competitive bidding auction for your policy. The broker then manages several rounds of bids and negotiations to get to the highest possible offer.

Once you accept the highest offer, you complete some paperwork to notify your insurance company and finalize the sale. You then receive the net cash proceeds and the buyer takes over your policy. When you pass away, the insurer pays out the death benefit to the buyer.

Who can you sell your life insurance to?

You can sell your life insurance directly to a provider, but this limits the value you get because you only get a single offer. On the other hand, working with a broker generally produces a higher cash payout because they create a competitive bidding environment for your policy among a network of premium buyers. That drives the price up. If you work directly with a single buyer, there’s no competition and no reason for that buyer to put forth a strong offer. 

Harbor Life Settlements is a life settlement company that can manage this process for you, from underwriting your policy to working with our broker-partner Harbor Life Brokerage to secure competitive offers from the industry’s top buyers.

Why selling your policy is better than surrendering it 

Selling your policy is better than surrendering it because the cash proceeds in a sale are much higher. Your policy’s value on the secondary market is always more than its cash surrender value — usually two to four times more. In some cases, the sales price can be as high as 60% of the policy’s death benefit. 

This makes sense because surrendering your policy to the insurance company means you only get a single offer resulting in a lower value. On the other hand, selling it enables you to seek multiple offers and negotiate so you get the highest possible value for your policy.

Outside of the cash proceeds, selling and surrendering your life insurance have similar outcomes. Both transactions leave you without any future premium payments. Both transfer the death benefit away from your chosen beneficiary. And both should provide you with cash that you can use for any purpose, without affecting your home equity or increasing your debt. 

The core difference is that selling your policy results in a much higher value, which is why it is the best method for cashing your life insurance. If you’re interested in selling your policy but aren’t sure where to start, contact Harbor Life Settlements. We’ll answer all of your questions, guide you through the process, and provide you with a free cash estimate on the value of your policy. If you choose to work with us, we’ll help you get the highest cash value for your policy while taking care of all the work so the process is as easy as possible for you.