What is a Life Insurance Policy Surrender?
A life insurance policy surrender is the act of cancelling your life insurance policy, “surrendering” it for the cash surrender value your insurance company has assigned you. Cash surrender value is the sum of money an insurance company will pay you, the policyholder, in the event you voluntarily cancel your life insurance policy before its maturity or an insured event occurs.
Oftentimes, a life insurance policy surrender comes with fees. Additionally, not all types of life insurance have a cash value. That is to say, if you were to cancel an insurance policy without cash value, there would be no cash surrender value – leaving you without coverage or cash.
While it is not advised anyone surrender their life insurance policy, there are some reasons why people choose to. Some common causes for life insurance policy surrender are:
- Loss of income
- Medical emergency
- Death in the family
- Risk of losing home
While surrendering your life insurance policy for some extra cash may sound like a good idea at first, there are some things you should be aware of.
What Are the Dangers of a Life Insurance Policy Surrender?
While surrendering your life insurance policy for some extra cash may sound like a good idea at first, there are some things you should be aware of. For example, some life insurance policies may have surrender charges. A surrender charge is a fee charged to the insured for withdrawing funds early on a contract. These fees can be significant. In other words, surrendering your life insurance policy for cash may actually mean that you get less money than you thought.
Also, by surrendering your life insurance policy for quick cash, you put your family at risk should something happen to you after the policy is cancelled. They may then have to dip into the cash value of your policy, which is oftentimes less than the life insurance policy death benefit. Suddenly, a life insurance policy surrender sounds a lot less attractive than it’s marketed to be.
That said, there are some extraordinary situations where surrendering your life insurance policy may be necessary. For those considering a life insurance policy surrender, it is highly recommended that you first speak with a licensed insurance agent. A licensed insurance agent will be able to discuss the benefits and risks of surrendering a life insurance policy and provide other options to a surrender, providing industry insight you may not otherwise have access to.
Regardless of the situation, surrendering a life insurance policy is a significant decision, and not one to be taken lightly. It’s vital that you protect your family from current financial hardship and provide your family with a plan in the event of your death.