A whole or ordinary life insurance policy builds cash value. One of the ways to access this cash value is to surrender or cancel your life insurance policy. Depending on your particular needs and circumstances, this may not be your best choice. Consider the information provided below and consult an accountant, your insurer or financial planner to help you determine the options that are available to you.
Finality
If you surrender your life insurance policy, all coverage under that policy terminates. Consider the impact that the loss of that coverage will have on you and your beneficiaries in the future, especially at the time of your death. If you need to purchase another policy, you will probably find your new premiums more expensive because you are older than when you purchased the first policy. You may also be denied coverage if you have medical conditions which have developed since your previous policy was issued.
Timing
The cash value of a life insurance policy is low during the first five or so years because initial premiums cover administrative costs of underwriting and issuing the policy. A whole policy builds cash value gradually. If you surrender your life insurance policy soon after purchasing it, you will receive less money than if you surrendered the policy later. The amount of time it takes between your notification to the insurance company of your intent to surrender to the policy and your receipt of the funds can vary; expect to wait at least 30 days to receive your money.
Other Access
Depending on the terms of your insurance policy, you may be able to receive a loan from the cash value of your life insurance policy, or withdraw a portion of the cash value. This would allow you to keep the policy in force while accessing the cash value. If you die before such a loan is repaid, the loan proceeds or withdrawn amount, plus any other unpaid amounts, would be deducted from the death benefit your beneficiary would receive.
Premium Payment
If you are considering surrendering your policy because you find it difficult to make your premium payments, talk with your insurance company. Many policies afford you the option of reducing the face amount of the coverage which results in a lower premium, or converting a whole life policy to a term policy which may also result in a lower premium. You may also be able to use the cash value of your existing policy to purchase a paid-up policy which requires no further premium payments.
Taxes
Generally, the proceeds you receive from surrendering a life insurance policy would not be taxable as income. However, if you receive amounts greater than the amount of premiums you paid, those amounts will generally be taxed as ordinary income. To understand how surrendering your life insurance policy may affect your taxes, talk with your accountant or tax professional.
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