Why Selling Your Life Insurance Beats Surrendering It

Why should you consider selling your life insurance instead of surrendering it? Life circumstances can change. You may no longer need or want life insurance coverage. This situation leads to a dilemma: surrender the policy or sell it. While surrendering is an option, selling it often provides significantly greater value. Here’s why.

Understanding Surrendering a Life Insurance Policy

Surrendering a life insurance policy involves canceling it before its maturity date or the policyholder’s death. Doing so yields the policy’s cash surrender value. This value, however, isn’t equal to the policy’s cash value. Why? Surrender fees and taxes impact the final amount. Surrender fees can range from 10-35%. Typically, fees are higher in the policy’s early years and decrease over time. There’s usually a waiting period, often at least 15 years, before surrender options become available.

What Happens When You Surrender a Policy

Surrendering cancels the coverage. You get a check for the cash surrender value, minus fees and taxes. This means you’ll lose insurance protection. Imagine you’ve paid $20,000 in premiums, and the policy’s cash value is $30,000. You must pay taxes on the $10,000 of earnings. If the tax rate is 22%, that’s $2,200 in taxes. Additionally, assuming a 20% surrender fee, you lose another $5,440. Your final cash surrender value would be $21,760.

Reasons for Surrendering Your Life Insurance Policy

Each individual’s situation is unique, but common reasons for surrendering include:

• No longer needing coverage: Once children are grown and independent, coverage might seem unnecessary.
• High premiums: Insurance costs can become unaffordable, and surrendering eliminates this financial burden.
• Finding a better policy: Sometimes, a past policy no longer suits your needs. Surrendering can allow you to purchase a more suitable option.
• Immediate cash needs: If you urgently need cash, surrendering provides a lump sum. However, there might be better options.

Pros and Cons of Surrendering Your Life Insurance Policy

Pros

Surrendering a policy is straightforward. You instruct your insurance company to surrender the policy, and they handle the details. Additionally, you’ll receive some money back, which is better than nothing, especially if the alternative is lapsing the policy without value.

Cons

Surrendering yields a minimal return. The insurance company aims to offer the lowest possible cash surrender value. Additionally, surrender fees further reduce the amount you receive. Finally, you have limited options. It’s a take-it-or-leave-it scenario with no room for negotiation.

Selling Your Life Insurance Policy

Selling your life insurance policy, known as a life or viatical settlement, involves transferring ownership to a third-party buyer. In exchange, you receive a lump-sum payment. The buyer then becomes the policy’s beneficiary, collecting the death benefit upon your passing. This option generally provides a much higher payout than surrendering. Working with a broker can be especially beneficial. Brokers present your policy to multiple buyers, fostering competitive bidding that drives up the price.

Should You Sell or Surrender Your Policy?

Selling typically offers a higher value than surrendering. According to surveys, selling provides an average payout five times higher than the cash surrender value. In some cases, the sale value can reach up to 60% of the policy’s death benefit. Selling allows you to solicit multiple offers, maximizing the policy’s value. On the other hand, surrendering restricts you to a single, lower offer from the insurance company.

Why Selling is the Better Option

Selling ensures you receive maximum value. Unlike surrendering, which often results in losing significant money to fees and limited payout, selling on the open market provides flexibility and higher returns. Brokers, working on commission, aim to secure the highest sale price, benefiting both parties involved.

With life settlements, you can still address immediate financial needs while receiving a fairer compensation for your policy.

Life Settlements

Life settlements represent a strategic way to convert an unneeded policy into liquid assets. We specialize in helping you navigate this option, offering professional guidance every step of the way. Our expertise in life settlements aligns with the philosophy of maximizing your financial returns and providing peace of mind. Contact us for an estimate, and let us assist in getting the highest possible value for your life insurance policy.