Cash Surrender Value: Know the Facts and Understand the Options
When a life insurance policy has outlasted its usefulness, the first step is for a policyholder to consider the best next option, and for universal and whole life policies that process starts with determining that policy’s cash surrender value. In order to understand the surrender value and its potential benefits or drawbacks, an individual at an insurance crossroads should know how that number is determined, why a surrender could be the best option for some people, and whether a possible alternative might be more profitable.
How Cash Surrender Value is Found
When a policyholder makes premium payments over the years to a whole life or universal life insurance policy, a portion of those payments accumulate as cash value and part of that amount goes to the death benefit of the policy. Cash surrender value is essentially the value of the money the individual has put into the policy, with a few variables like the performances of the markets in which the insurance company invested your money and the subtraction of fees charged by the agency.
For universal life, the longer a policy is in effect and the more robust the markets that were selected for a policy’s investment, the larger the cash surrender value will be. The value of a whole life policy grows at a fixed rate designed to grow the policy to the amount of the death benefit when the policy matures. Term life policies do not have a cash surrender value. The cash surrender value should be readily available to the policyholder with just a simple request to the insurance agent. Periodic reviews of a life insurance policy are recommended for everyone, and through the review process the policyholder will be able to track the growth of the surrender value.
When Terminating a Policy Might Be Beneficial
Every situation is different, and some people might find that they need to retain their life insurance policy but still need to obtain some of the cash value that has accrued. In those cases, a policyholder might borrow against their cash value, arrange to pay premiums using the cash value or even take out part of the cash value while leaving the policy in effect (the second and third options are not recommended for whole life insurance policies).
But if the policyholder’s circumstances have changed so much that the death benefit is no longer needed, an individual might decide to surrender the policy in order to receive the net cash surrender value. If a policy has been in place for a decade or more and the policy’s investments have fared well, the cash value will be hit with fewer fees and surrender charges. In that scenario, it might be worthwhile for a policyholder to benefit from that money and stop paying premiums at the same time. Such a decision, however, should be made only after weighing the other options available for making a profit off of an unwanted policy.
A Better Option?
It is crucial for those with life insurance policies to understand the determination and amount of their cash surrender value, but that doesn’t mean that their best path is always surrendering the policy to get their hands on that cash. The more lucrative option, in many cases, is to pursue the sale of the policy through a life settlement.
Life settlements aren’t the right choice for everyone, but if you are a candidate for a settlement you could yield a payout that is significantly higher than the cash surrender value of the life insurance. The two chief variables that determine suitability for a life settlement are the impairment level of the policyholder and the cost structure of the original policy. Generally speaking, the more serious the health impairment, in inverse relation to a more favorable rating when the policy was issued, creates the best situation for a profitable life settlement.
For example, if a universal life policy was issued at preferred-plus and the policy holder becomes significantly more impaired than predicted, a life settlement could yield sums up to four times the stated cash surrender value. Despite the possibility of a significantly larger payoff, many seniors go with a surrender anyway and take the cash value, because they have never been informed about the potential advantages of a life settlement.
Every policyholder should be informed about the value of their policy and the options before them when the insurance is no longer needed. Magna is a trusted life settlement representative that also works with insurance agents looking to present the best possible scenario for their clients. Seniors interested in learning more about the life settlement option can use our simple life settlement calculator to determine their next steps, and agents can learn more about our services to partner with insurance professionals by viewing our resources here. With the right information, insurance policies that have become a liability can benefit policyholders and help offset costly retirement expenses.