Surrendering Life Insurance Policy
Reader Question:
What are the consequences of surrendering my Life Insurance Policy? I’m very confused; will you explain this to me? Thank you, Deana
Thank you for your question, Deana. When you surrender your Life Insurance you are canceling the policy altogether. In these difficult economic times you may consider liquidating assets for cash; you may think you have no other choice. Ask yourself first if you still need the coverage and whether your beneficiaries would be dependent on the death benefit if you were to pass away?
Consequences of surrendering insurance
When you surrender your policy to get the cash, you understand that you are giving up the right to the death-benefit protection of the insurance. It may be harder or more expensive to get the same coverage later. Also the gain on the policy is subject to income tax when you surrender the policy for cash, and additional taxes may be incurred if you have an outstanding loan balance against the policy. If yours is a cash value life insurance policy and you surrender it, you may be subject to a taxable gain if the policy’s total cash value exceeds the cost basis of the policy.
Whole life, universal life and variable life insurance policies have a savings component which is also known as “cash or surrender value” or policyholder’s equity”. Life insurance policy holders may borrow against the cash surrender value of the policy and if yours is a non-MEC (modified endowment contract) policy it isn’t taxable, and you won’t have to make payments on the loan even though your loan balance might be gaining interest.
Other options to consider
You might be wise to borrow against your 401K, or take out a home-equity loan instead. Of course there are issues to consider with these choices as well, but depending upon your current needs and circumstances, some choices may be better than others.
Check with your agent to find out what is and isn’t allowed with your policy. This decision should only be made after due consideration of all the facts and options. I trust this has helped to simplify your decision, Deana.
Category: Reader Questions
