If you no longer need life insurance or want to cancel for some other reason, you might be thinking about surrendering your permanent life insurance policy and withdrawing the cash value that has accumulated. But before you do it, here are some things you should consider.
What is the surrender value?
As your cash value life insurance policy ages, it typically gains surrender value. If you choose to cancel your cash value life insurance policy, this is the amount of money you will receive. Here's how insurance companies calculate the surrender value of your policy:
Current Cash Value
Outstanding Loans and Loan Interest
You may find that your insurance company prints your policy's surrender value on your statement, but more likely you'll need to contact your insurer to obtain this information. Even if your statement provides this information, you may want to check with your insurer for the most recent figures.
Why surrender your policy?
You had a good reason when you bought your cash value life insurance policy. Now, be sure you have a good reason for getting rid of it. There are many good reasons to think about surrendering your life insurance policy, including:
·The reason you originally bought the policy no longer exists
·You can't afford to pay the premiums anymore
·You need cash, and this is your only source of available funds
Did you buy your policy because you had young children to protect, but now they're grown and on their own? Or did you buy it to protect your home purchase, but you've since paid off your mortgage? If you're thinking about surrendering your policy, make sure that you don't have new reasons to keep the policy in place (e.g., grandchildren). If you cancel the policy and then change your mind, you could end up paying a lot more for a new policy than you were paying before.
Typically, the premiums on your cash value policy will remain the same throughout the policy's life. At some point, however, you may find it difficult to meet those payments. Perhaps your income has dropped due to a job loss or recent retirement. Or you may find yourself in need of cash for an emergency or large expenses (e.g., medical bills or college tuition). Before you surrender your policy to come up with the necessary cash, see if you can't find another source. If you're a homeowner, one idea might be to take out a home equity loan. The interest on these loans is tax deductible, and you'll be able to keep your life insurance protection in place. Another option is to ask a family member for a loan. If you choose to ask your family, be sure you're all clear and in agreement on the terms of the loan. Blood may be thicker than water, but money can take a toll on any relationship.
You can also take a loan from the life insurance company using your cash value as collateral. Unless this is prohibited in your policy for some reason, the insurance company must grant this loan--no questions asked--and the interest rate may be fixed at a lower rate than your bank is charging. What's more, you never have to repay the loan, as it will be subtracted from the death benefit or future cash surrender value. However, interest on loans from life insurance companies is not tax deductible.
Surrender a piece or the whole enchilada?
You can choose to surrender your policy in part or in whole, subject to the insurance company's rules. With some types of insurance policies, you simply divide the policy and surrender one portion and keep the other. Your death benefit and cash value are reduced proportionately. Other policies allow for withdrawals of a portion of the cash value, leaving the death benefit more intact (the death benefit will still be reduced by at least the amount of the withdrawal, and probably somewhat more depending on the policy values at the time). One common strategy is known as surrendering or withdrawing to basis. The basis is the total amount of premiums you've paid on the policy, less any dividends previously paid out. Because you paid your premiums with dollars that were already taxed, surrendering to basis is generally not a taxable event. Amounts you surrender or withdraw over and above your basis will be taxable income to you. Keep in mind, though, that surrendering, withdrawing, or borrowing against your cash value will decrease the death benefit that you leave to your beneficiaries.
The other option is to surrender the entire policy and cash out. If you choose this option, be sure that you still have a fluffy financial cushion to protect your loved ones, in case the unexpected should happen.
What's it going to cost?
You can surrender (cancel) your policy, but surrender fees will likely be charged if you do. These charges will vary depending on how early or late in the life of the policy the cancellation occurs. For example, some policies carry a 15- to 20-year surrender schedule, in which the charges decrease as the years progress and eventually disappear. In addition, when you surrender your policy for cash, the gain on the policy is subject to federal income tax (your gain is the difference between the cash value, less outstanding policy loans and your policy basis).
Is surrendering right for you?
Whether or not to surrender your life insurance policy is a complicated decision, one that you probably shouldn't make on your own. The best approach is to talk with a trusted professional advisor, such as your insurance agent and financial planner. He or she can help you analyze all of the issues involved and decide if you should surrender the whole policy, surrender part of it, or leave it alone.
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Securities offered through Securities America, Inc., Member FINRA/SIPC and advisory and financial planning services offered through Securities America Advisors Inc. Susan Powers, Paul Hundley, Brendan Hayes, Kim Harris, Chuck Zodda, Representatives, Money Matters Radio, Armstrong Advisory Group and Securities America, Inc. are separate entities.