Sometimes in life you may have to give up your insurance policies as you need cash badly. It could be an emergency situation that you have no other way of solving, such as saving a failing business or paying a credit bill that has snowballed out of control.
How do you go about surrendering your policies? Read up to understand more about the meaning of cash surrender value, and also understand what alternatives you have.
Surrendering your insurance policy
When you surrender your insurance policy, you basically give up any remaining coverage. Your insurer will then give back a cash surrender value. This amount will be less than the promised death benefit payout.
To see if you can surrender your policy for cash value, you need to first determine whether your policy is “participating” or “non-participating”.
For participating policies, the final cash value will be calculated based on how old the policy is. In order words, how many years has the policy been in effect since the start? Therefore based on when you surrender, the surrender value is different. The cash surrender value comprises a guaranteed cash value and a non-guaranteed cash value.
For non-participating policies, there is no cash value. If you already paid your yearly or monthly premiums, you can simply enjoy the coverage until the policy lapses.
Take note. Whenever you surrender or terminate a life insurance policy before its maturity, it will always result in a financial loss. And once you have surrendered the policy, you stop receiving any coverage.
Cash value VS cash surrender value
Cash value: The sum of money that builds within a life insurance policy.
Cash surrender value: The sum of money the insurer gives you when you decide to surrender your policy. It is lower than the cash value because there are charges when you terminate your policy early.
Death benefit: What you get when you encounter death or TPD, which is also termed as “sum assurance”
How it works: You purchase a whole life policy, with a death benefit of $500,000. You have been paying consistently for 20 years and currently there is $250,000 worth of cash value in the policy. You want to surrender the policy due to urgent cash flow issues. The surrender charge after 20 years is 40%. That means that when you surrender the policy, you get back a cash surrender value of $150,000 (60% of $250,000).
Can I withdraw from the cash value?
If you’re not ready to completely give up on the policy, you might be wondering if you can “withdraw” some money from the policy’s cash value. You can, by way of a policy loan. Basically you borrow from the cash value of a policy.
But be very careful as the interest charges can be very steep. Thus, only do so if you know that you will be able to pay it back within the stipulated period. Unpaid amounts from the loan will also be offset from the policy’s cash value or claim payout.
Selling your insurance policy
An alternative to surrendering your policy is to sell your policy to a third party, who will then take over all future premium payments. By doing so, you typically get a higher amount that you would if you had surrendered it.
You can sell endowment policies, whole life policies and any other insurance policies with surrender values. You can also sell policies even when the premium payments have lapsed.
After selling the policy, the buyer will gain all rights and benefits. This is known as absolute assignment. You, as assignor, get back cash value, while the third-party buyer, the assignee, will continue paying the premiums and also be entitled to payouts in the event of death and TPD.
Between selling and surrendering, selling your policy makes more financial sense. Do your research, however. The trading of an insurance policy is currently not regulated by authorities. You definitely don’t want a situation where after you surrender the policy, the cheque you get in return cannot be processed.
Look for an institution that has a strong reputation and ensure that the new policy owner can offer you better money than what you would receive if you had just simply surrendered the policy to your insurer.
After you have surrendered or sold your policy to solve cash flow issues at hand, you may feel at ease. But don’t forget to review your insurance coverage. Even if you may not be able to afford the same level of coverage due to your financial situation, you can get a term life insurance policy to plug the protection gap. As term life insurance has no surrender value, the premiums are typically much more affordable.
Whether you need to sell, surrender or secure cheaper premiums, you need to compare across insurance policies.