To surrender a life insurance means you will have to completely cancel your life insurance policy and you can do so at any time. When you surrender a life insurance policy, it will not affect your credit score in any way; neither will it affect the chances of getting a new life insurance in the future, unless your health changes.
The fees that are associated with your surrender are called surrender charges. If you have cash value included in your insurance policy then the surrender fee is taken from that. A term insurance policy does not include any kind of surrender fee, only permanent life insurance policy does.
In Layman’s terms, cash surrender value is the amount of money an insurance company is willing to pay to its policyholder in case he/she willingly cancels their insurance before it matures. People tend to terminate their life insurance because over the course of time they experience various life changes, and these changes may have a huge impact on their financial standing and they may need financial help.
So, in cases like these, it gets hard for them to keep paying a premium towards their insurance, hence the surrendering of life insurance policy. The process to surrender a life insurance policy can be quick and painless, but if you want it to be effective it is important that you understand the process.
Reasons for surrender:
Before we move on to the process, let’s understand the reasons behind surrendering a life insurance policy:
>> Cash Value:
The main advantage of surrendering a life insurance policy is the access the policyholder has over the policy cash value. When a policy is released to the holder the premiums are ceased, but the saved amount that was stored in the cash value is released as well. If in the past, they have withdrawn any amount or taken a loan from their cash value savings, then, minus the deductions whatever remains is the money the policyholder will release; the older the policy the higher the cash value.
>> Surplus Coverage:
People’s lives change over time and they might not need life insurance policies anymore. Children grow up and may not be dependent on their parents anymore for financial support and marriages turn to divorce; so insurance for a spouse is also not needed anymore, hence, the surrender of policies.
How to surrender a policy:
Mostly, the process of surrendering a policy is quite easy and pain-free. An insurance company is legally limited to how long they can hold onto their clients’ money after receiving a surrender request. Now let’s walk through the process of surrendering a Life insurance policy:
- Firstly, you will need to get in touch with your insurance provider and ask for a surrender form. Inform them as to why you want to surrender your policy. Don’t forget to ask if a letter of instruction is enough to surrender the policy.
- The next step is to fill in the form or write a letter of instruction.
- Send the form through priority mail.
- Once the tracking indicates that they have received it, call and check to confirm if the mail is received.
- After following the above-mentioned steps you will receive your funds shortly.
Tax Consequences of Surrender:
Any type of gain that is the outcome of your policy will result in being taxed at your marginal income rate. The amount of money that you invest as cost basis is not subject to taxation because the after-tax money will be used to fund the policy. Policy owners should always conduct a consultation with a qualified and smart tax advisor. Ask for their advice if you ever feel or know that your policy is going to be taxed.
What kind of policy is eligible for a cash value?
Risk protection policies will not have surrender values, only life insurance policies; specifically permanent life insurance, that has savings, is eligible for surrender.
Pros and Cons of Surrender Value:
Under normal conditions, long-term insurance policies are not surrendered, because an early surrender can cause a loss to all the parties that are involved- the insurance company, the policyholder and the insurer. This is because the longer you pay the money for the premium, the better the benefits are.
However, it is important to keep in mind that when you are surrendering your life insurance policy it may cost you and your beneficiary the death benefits. But this option is a safety net to people who need money when it is really required.