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If your financial situation changes or you urgently need money, you might consider cashing out your life insurance policy. This means ending the policy before it matures.
Instead of the full payout you’d get at maturity, you’d receive a smaller amount called the surrender value, the portion of cash your policy has built up over time. Cashing out usually isn’t the best option, but it might make sense if you’re struggling financially or have a better place to invest your money.
Key Takeaways
- Cashing out a life insurance policy means ending it early.
- Instead of the full payout, you’ll usually get part of the cash the policy has built up.
- You might decide to cash out if you don’t need the coverage anymore, can’t afford the payments, or have a better way to use the money.
Understanding the Surrender Value of a Life Insurance Policy
When you cash out a life insurance policy, you receive the surrender value—the amount of cash the policy has earned so far. It’s typically lower than the full death benefit, but it still reflects the money your policy has built up over time.
To calculate the surrender value, the insurer estimates the cash value you currently have and subtracts surrender fees from that amount. For instance, if you have $10,000 of cash value on a $100,000 policy and your insurer charges a $1,000 surrender fee, you’ll receive a surrender value of $9,000.
Important
Term life insurance policies do not have a cash value, so you won’t receive a surrender value payout if you cancel the term policy. This is because term policies are designed to only offer coverage for a set period of time.
Reasons for Surrendering Your Life Insurance Policy
If you bought your life insurance policy years ago, your financial situation may look very different now. You might have no dependents because your children are grown and financially independent, or your spouse has died.
You also might consider surrendering the policy if you’re struggling to pay the policy’s premium or you need to free up funds for a big-ticket purchase. If you’re a savvy investor, you might have better investment opportunities than those offered by your life insurance policy.
Lastly, you might want to cancel the policy to cut ties with the insurer. Maybe you’re dissatisfied with the customer service or want to work with an insurer who can offer you better policy terms.
Downsides of Surrendering Your Life Insurance Policy
Before you cash out your life insurance policy, consider these drawbacks:
- Loss of death benefit: The beneficiaries listed on your life insurance policy won’t receive a payout when you die. If you haven’t provided for funeral expenses, this can leave them in a tough spot financially.
- Fees and taxes: You’ll receive a reduced cash value. Your life insurance company will likely deduct fees from the payout because you canceled the policy, and you might be on the hook for taxes if the amount you receive is more than the amount you paid for the policy.
- Difficulty obtaining future coverage: You might not qualify for a new policy since insurers consider canceling a policy a negative factor. If you are eligible for new coverage, you may pay significantly more since your age and health aren’t what they were when you took out the initial policy.
- Loss of potential growth: If you have a permanent policy that accumulates cash value over time, withdrawing the funds will cause you to lose out on growth.
Alternatives to Surrendering
Instead of dumping your life insurance policy, consider these alternatives:
- Partial withdrawals: Some insurance providers allow partial withdrawals from the policy’s cash value. You may have to pay a fee.
- Policy loans: Ask your insurer if you can borrow against the policy using your cash value as collateral. Don’t forget to ask about terms and interest rates, which could reduce the death benefit.
- Life settlement: Work with a life settlement provider or broker to sell your policy to a third-party buyer. You’ll receive a lump sum, and the buyer will resume payments and receive the payout.
- Reducing coverage: If you’re hard-pressed to pay for your life insurance policy, work with your insurance company to renegotiate the terms. The company may be willing to reduce coverage in exchange for charging a cheaper premium.
The Bottom Line
You can cancel your life insurance policy, but looking at other options is usually better. If you’re having trouble paying premiums, talk to your insurer to see if there are ways to lower your costs while keeping some coverage in place.
