Should You Surrender Your Life Insurance Policy for Cash Value?
Updated: Mar 7
Owning a universal life insurance policy provides you with a number of different options on what you can do with them, which is why they’re often referred to as flexible premium adjustable life insurance policies. And one of those features is the cash value account, which can be surrendered if you decide you’d rather take the cash than keep the life insurance coverage.
If you’re considering surrendering your life insurance policy for cash, there’s a few things you should consider before making any moves.
For one, if the insured is age 70 or older, or has a terminal illness, there’s a good chance you could get more money by selling the policy to a 3rd party investor than you would if you just took the cash surrender value. Many policy owners hang onto their policy as long as they can without paying attention to the cash surrender value until there’s only a little left. You’re almost certain to do a lot better in the life settlement market than by just surrendering say a $500k policy that only has $2500 of cash surrender value in it.
Each case is unique though, so let’s take a closer look.
Cash surrender value is money an insurance company pays to a policyholder or an annuity contract owner if their policy is voluntarily terminated before maturity or an insured event occurs. (1)
Universal life and whole life insurance policies are structured in a way where they have an increasing cost of insurance the older you get. The real reason the cash value account is associated with the policy is to help off-set those future increases in cost. Unfortunately though, it leaves a lot of room for error, and nobody knows exactly how long they will live, so it’s common to under fund these cash accounts. And many policy owners start a policy with a premium amount that they simply just continue paying for many years without paying attention to policy values and any changes in future costs. It’s also common to skip paying a premium in retirement age when you have the cash in your cash account to do so. Hey, another year of coverage and I don’t have to pay anything? Sounds good, right? In reality it most likely will only lapse your policy sooner, but hopefully you give yourself enough time to get life settlement offers when your cash starts to get low, which can take a few months to complete.
As an example, if you start a policy when you’re in your 40s your cost of insurance might only be $1500 a year, but you’re paying a $5k annual premium. The remaining $3500 or so gets placed into your cash account and grows with interest over time. You keep paying $5k a year with the expectation that you won’t have to pay any more than that and the coverage will last until you pass away in old age.
When you reach your 70s, your cost of insurance may have increased to maybe $20k a year. Also, by this time hopefully your cash value account has grown to where it now has over $100k in it. When you go to make your $5k annual payment and your cost of insurance is $20k that year, the remaining $15k will be withdrawn from your cash account. Since you have over $100k in your cash account there’s plenty in there to cover the difference, but you can see in the years ahead that your balance will reach $0 in just a few years. Many people in their 70s wonder if they have much time left, so a few more years sounds like enough time, but in reality most of these people will reach that point where they’re nearly out of cash and simply can't afford to cover the full cost of insurance for another year on the policy, and the whole contract can go to waste.
Once your cash value account reaches $0 then the insurance company will need you to pay $25k (or maybe even $30k now) just to keep the policy in force for another year, and this is often when policies lapse because people simply can’t write a check for that amount. If they’re paying attention and haven’t lapsed yet, they can still apply for life settlement offers.
Depending on how your cost of insurance was structured, your highest cash value balance probably occurred in your 50s or early 60s until your cost of insurance started exceeding both the $5k premium you paid and the interest you were making on your cash account. At that point the cash account starts dwindling, and the more expensive your cost of insurance gets the faster the balance depletes. Whenever I look at a new illustration for a new universal life policy, it’s easy to see in older age where the cash account stops getting bigger and starts shrinking; and it gets smaller significantly faster than it took to grow that balance and suddenly the coverage ends unless you fork iver a crazy amount of money.
Hindsight is always 20/20, and looking back you would have been much better off if you surrendered your policy in your 50s or 60s, but back then you probably still needed the coverage, so you held onto the policy. Now that you’re older you might not need the coverage anymore, but your cash account also might not be all that impressive either.
The good news is that even if you have little to no cash left in your cash value account, we still might have a chance at selling the policy and getting you some money back. And depending on your unique situation, that might be $10k, or it might be $100k, or maybe $1MM+.
Unfortunately for Whole Life policies, there’s usually not a lot of flexibility on the premiums. They’re a more conservative product than universal life policies, and therefore the cash value typically grows to a significant amount when the policy has been in-force for a long time. Someone who is older with a whole life policy might have a $350k surrender value on a $500k policy. It’s going to be very unlikely that a life settlement company will be able to offer more than $350k on the policy, so your best bet may just be to surrender it for the $350k.
The life settlement industry started to pick up around the year 2000, and has grown significantly since then, particularly since the industry has matured and underwriting has gotten better at predicting life expectancies. People wonder who buys life insurance policies, and it turns out various hedge funds, mutual funds, and private investors have gotten into the space, and the demand for settlements only grows as the population ages.
Every day 7000 baby boomers turn 70, with the oldest turning 77 in the year 2023. An independent study found that only 15% of universal life policies actually end up paying the death benefit. The other 85% of policies either lapse or get surrendered for their cash value.
Many people purchase universal life contracts with the expectation that it will pay a death benefit no matter how long they live, but the reality is that the insurance carriers have structured these policies in a way that makes them likely to lapse if you live into your 80s and 90s. If that’s any indication of whether or not you should hang onto your policy for the long haul, you might want to consider getting life settlement offers and investing that money elsewhere.
Even if you have a term policy, you can still sell a term life insurance policy in a life settlement if it’s still convertible to universal life.
A great place to start is by getting a free appraisal by hitting the button at the top of the page, and we'll be in touch shortly to help answer all of your questions.
Is it worth cashing out a life insurance policy?
Most people sell their policy when they realize they don't need the coverage anymore, they need access to cash, they don't want to pay the premiums anymore, or they can't afford it anymore. In all of those situations it is worth it to cash out.
What happens when a policy is surrendered for cash value?
When you surrender, the insurance company sends you a check and your life insurance contract is cancelled. Oftentimes people receive a bit more than their surrender value when they sell their policy in a life settlement.
Is it smart to surrender a life insurance policy?
The majority of life insurance policies do not end up paying a death benefit. People get to a point where they can't pay the premium anymore, and if there's no cash surrender value they lose everything. Surrendering at the right time can be much smarter than trying to hold onto it forever, and selling it in a life settlement for more might be even smarter.
What is the average cash surrender value of a life insurance policy?
The surrender value is all dependent on how you've funded your policy, and how long you've had the policy. Some people might have $100k in cash surrender, but many more retirees probably just have around $5k - $10k in surrender value when they eventually check.
(1) Reference: https://www.investopedia.com/terms/c/cashsurrendervalue.asp
4 years in life settlements
About the author:
I'm a life settlement advocate who became passionate about the industry when I helped my grandfather secure over 60% of his death benefit. Recently, I assisted an 81-year-old woman with $140k annual premiums by finding an investor to buy out her policy while still receiving most of her investment back.
I've also helped clients with expiring term policies receive payouts of $10k - $15k by converting to a new universal life policy. I enjoy educating both agents and clients on the potential benefits of life settlements and am always happy to provide feedback on potential cases.