When you're in the market for a life insurance policy, you have a choice between a term insurance policy, which is less expensive but builds no cash value, and a permanent plan such as whole life, universal life or variable life. With permanent plans, you have the option to surrender the policy for its accumulated cash value. There are a number of factors you should consider before deciding to surrender a permanent insurance policy.
Cash surrendering a life insurance policy simply means that you agree to return the policy to the issuing company in exchange for any cash that has accumulated over time. Any surrender fees that are specified in the contract with be subtracted from the amount you ultimately receive. You can surrender the policy for virtually any reason, such as the need for the cash to cover a specific need, the unaffordability of the premium or because you no longer feel you need the policy.
The impact of surrendering a life insurance policy is that your family might lose the financial security life insurance can provide in the event of your death. If you decide at some point in the future that you need to take out a new policy, you may have to pay a much higher premium as insurance companies base their rates in large part on your age on the date of issue. If your health has declined, you may not be able to obtain coverage at all. Also, any amount you receive in excess of the premiums you've paid over time is generally considered as taxable income by the IRS.
In most cases, you can surrender your policy simply by returning it to the company along with a letter indicating your intention to surrender. Another option is to engage in a transaction known as a life settlement. With a life settlement, you agree to sell your policy to a third party for an amount greater than the surrender value but less than the face amount. Sellers need to be certain that the life settlement company is reputable and is offering a fair price for the policy.
If you need funds quickly but don't necessarily want to give up your life insurance protection, another alternative is to borrow against the policy's accumulated cash value. You can borrow at a relatively low interest rate and you are not obligated to repay the money. However, any amount plus interest that has not been repaid at the time of your death will be deducted from the policy's face amount, meaning your beneficiaries will receive less money.