Surrendering Your Life Insurance vs. Getting a Life Settlement: What’s the Difference?

Let’s get straight to the point:

When you surrender your insurance policy, you agree to get a cash payout in turn for giving up the death benefits of your policy. This means, upon death, there’s no payment to your beneficiaries. The payment you’ll receive with a cash surrender of your life insurance is the cash value of that policy minus any fees like surrender fees and early termination charges. 

If you need cash and want to stop making monthly payments, surrendering your policy may solve both issues. How much you get paid depends on the Cash Surrender Value of your policy, as described in more detail below. But some policies – like term life – may not qualify for a cash payout at all. 

There are two things to keep in mind when considering surrendering your policy:

  •   If your policy is not very old, you may incur surrender fees, which will reduce the amount of cash you receive.
  •   The gain on your policy—however much it may be—will be taxed as income. Death benefits are tax-exempt, but the cash you receive from surrendering is taxable.

What Is My Cash Surrender Value?

The cash surrender value is the total sum of money an insurance company pays to a policyholder if their policy is voluntarily terminated before the policy’s maturity or death of the policyholder. So it’ll depend on your policy. Cash value applies only to Whole and Universal policies, but not Term policies. This cash value is equal to the savings component of most permanent life insurance policies, particularly whole and universal life insurance policies. It is frequently referred to as the “cash value,” or the “surrender value,” and also called the “policyholder’s equity.” 


Should you Surrender Your Policy or Take a Life Settlement?

A life settlement will always, without exceptions, provide the policyholder a higher amount of cash. If a policyholder qualifies for a life settlement it’ll always be the better choice except for specific cases (read  Is a Life Settlement Right For You?). It’s important to understand that for the insurance company this means that the policy will never lapse (so a life settlement will cost them more). 

In a life settlement, the policy’s original owner transfers their ownership to a designated company in return for an immediate cash payment. The best candidates for life settlements are typically 65 years of age or older, with a policy payout above $200,000, or if they have major health issues in any age or if their policy is a universal life policy.

Depending on the age and type of policy, a life settlement may be worth five to eight times the cash surrender value. Term life insurance policies make great options for life settlements if they have a conversion rider allowing converting the policy into a permanent life policy, which in turn facilitates a sale of the policy through a life settlement (“convertible term policy”).  

If you are below the age of 65, in good health with a policy payout of $200K or less it’ll probably make more sense to surrender your policy to the insurance company. If You are over the age of 65, with a policy of $200K and above, or if you have major health issues (at any age) or if you have a universal life policy you should definitely reach out and check if you qualify for a life settlement and get an offer for your policy.