When To Surrender a Life Insurance Policy (2024) (2024)

FAQs

When To Surrender a Life Insurance Policy (2024)? ›

You'll likely want to wait 10 to 15 years after buying a policy to cash it out. That length of time gives you enough time to build up significant cash value. If you cash out your policy, the length of time you own it will help lower the cost of surrender or early cancellation fees you might pay.

"Since a withdrawal generally reduces the policy's death benefit, a person who wants to maximize that payment should not withdraw cash value." Ultimately, deciding whether to draw cash from a life insurance policy comes down to personal need.

Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they retire, their kids have grown up, and they've paid off their mortgage and other debts.

Surrender the policy

You'll generally receive most or all of the cash value that has accumulated in your life insurance policy, but it may be subject to surrender fees and federal income taxes. Any unpaid premiums will also be collected.

Calculation of max life insurance Insurance Surrender Value

30% X the total amount of premiums paid is the Guaranteed Surrender Value. The first-year premiums, all additional premiums, accident benefit premiums, and term rider premiums are not included in the same.

Is life insurance cash value taxable? Fortunately, the cash value of life insurance grows tax-free. This means that, in many cases, you won't have to worry about paying taxes on it.

A life insurance policy's cash surrender value can be taxable. Any amount you receive over the policy's basis, or the amount you paid in premiums, can be taxed as income.

You'll likely want to wait 10 to 15 years after buying a policy to cash it out. That length of time gives you enough time to build up significant cash value. If you cash out your policy, the length of time you own it will help lower the cost of surrender or early cancellation fees you might pay.

According to the LIC brochure: Guaranteed Surrender Value = 30% X Total premiums paid. The first-year premiums and all the added premiums or premiums for accident benefits or the term rider are excluded from the same.

For annuities and life insurance, the surrender fee often starts at 10% if you cash in your investment in year one. It goes down to 1% if you cash it in during year nine and no surrender fees in year 10 or longer.

Is there a penalty for surrendering life insurance? ›

You may have to pay surrender fees for canceling your coverage early, which will be deducted from any cash value your policy has or paid out of pocket if you have a term policy. You may also have to pay taxes on the surrender value if earnings exceed the amount you've paid into the policy.

Fortunately, it's easy to calculate your cash surrender value. First, add up the total payments you've made toward your life insurance policy. Then, subtract the surrender fees your insurance company will charge. You'll be left with the actual payout you may receive if you terminate or surrender your life insurance.

Usually, this special surrender value is determined with the formula - (Accrued bonuses + Paid-up value) multiplied by the surrender value factor. The paid-up value is calculated as the Basic sum assured multiplied by the number of premiums payable or the number of premiums paid.

Some policies will have a surrender fee in the case of cashing out an entire policy, while others may charge fees for partial surrenders. Other than that, there are no additional penalties or fees. The surrender fee is usually 10% to 20% but it can be as high as 35% to 40%. Check your policy contract.

Because whole life insurance never expires, you do not need to worry about outliving it. However, your policy may pay out before your death if you live to a certain age. Most whole life policies endow at age 100, while some recently issued policies now offer a maturation age of 121 years.

Withdrawals, including policy loans, are tax-free up to total premiums paid unless it's a modified endowment contract. Interest earned on beneficiary life insurance proceeds or periodic (annuity) payments is generally taxable.

The Bottom Line. You might want to surrender a life insurance policy for several reasons. Whether you can't afford your insurance rates or find better coverage with a different policy, surrendering your policy gives you access to part of your cash value, minus surrender fees.