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Why Avoid Surrendering Life Insurance Policies

Why Avoid Surrendering Life Insurance Policies

While a life insurance is designed to remain for your entire lifetime

, there are circumstances where people consider surrendering their life insurance to gain access to the cash value. Depending on your particular needs and situations, this may not be your best option. It is well worth to know the consequences and alternatives of surrendering life insurance policy.

Consequences of Surrender

When you surrender your policy, all coverage under that policy automatically terminates. Think about the impact that the loss of coverage will have on you and your beneficiaries in the future, especially at the time of your death.

Life insurance policy is created in such a way that you do not build respectable cash value until at least their seven year mark. So if you surrender your policy during the first 5 to 7 years, you would have paid excessive premiums without receiving much in return.

Many financial analysts believe that insurance plans like whole life insurance, dont yield a sufficient return until at least 20 years after issue. So surrendering before 20 years will hamper your return in a huge way.

Once you give up your insurance policy, getting another one might be difficult. Even if you do get one life insurance premium might be costlier as you are older than when you bought the first policy. You may also be denied coverage if you have medical conditions which have become apparent since your previous policy was issued. Surrendering your policy may then mean you will lose life insurance altogether.

No doubt that you will receive the cash value by surrendering your policy, but surrender value is always less than the death benefit (face value) which is provided to your family in the event of your death.

In most of the cases you will have to pay a penalty if you surrender your policy known as deferred sales charges.

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.

By canceling your policy, you are not only losing life insurance coverage but also all the additional payments you've made in those earlier years. Before coming to any such conclusions, research the probable tax and other financial implications. In most cases then, it's worthwhile considering other options of obtaining funds as discussed below in order to avoid giving up your policy.

Alternative options

Borrowing from the Cash Value

One alternative to canceling your policy is to borrow on the cash value. Depending on the terms and conditions of your policy, you may be able to get 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 intact while accessing the cash value. Borrowing from your life insurance policy can be a means of saving your policy.

Withdrawing from the Cash Account

Pulling out from the cash account is another option of accessing money, though this will reduce the cash value and the death benefit permanently. Some types of life insurance policies will prevent you from making withdrawals. If you do have this right, make sure you research the tax consequences. Depending on how much you've paid as life insurance premium and the amount you remove, you may need to pay income tax on the surplus.

Talk to the Insurance Company

If you are considering surrendering your policy due to your inability to pay the life insurance premium regularly, talk with your insurance company. Many policies give you the option of reducing the face amount of the coverage which results in a lower premium.

Sell your Policy

If you are hard on cash, another option that might work for you other than surrendering the life insurance is to sell it. Selling your policy might get you higher reward from the insurance company.

by: SjoerdN
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Why Avoid Surrendering Life Insurance Policies