Whole Life Insurance – Should I Surrender My Policy?

Whole life insurance can be a complex product. Whilst it’s designed to remain for your entire lifetime, there are circumstances where people consider surrendering their policy to gain access to the cash value. This article discusses the consequences of surrendering a Whole Life Insurance policy and alternative options for obtaining funds.

Implications of Surrender

These types of policies are generally set up to avoid building respectable cash value until at least their seven year mark. This means if you surrender your policy during the first 5 to 7 years, you would have paid excessive premiums without receiving much in return. In effect, you would have received term insurance at much higher rates. Once you cancel the plan, you will lose the benefit of having a permanent life insurance policy so you might as well have purchased term insurance and saved your money.

Many analysts claim that whole life insurance plans don’t yield a sufficient return until at least 20 years after issue. At this stage, you may have sufficient cash value, however you need to consider that once you lose your life insurance policy, getting another one will be difficult.

If you are over 50, term insurance will be very expensive and you may even be deemed uninsurable if you’re in poor health. Surrendering your policy may then mean you will lose life insurance altogether. Whilst you will receive the cash value, this figure is always less than the death benefit (face value) which is provided to your family in the event of your death. In most cases then, it’s worthwhile considering other options of obtaining funds in order to avoid giving in your policy.

Borrowing from the Cash Value

One alternative to cancelling your whole life policy is to borrow on the cash value. This involves your insurance company or another lender advancing a loan to you secured by the cash value.  Usually you can borrow up to 90% of the balance in the cash account. Any loan that you take against your cash account will incur interest charges. However, insurance companies often provide competitive rates which are more favorable than obtaining an unsecured loan elsewhere.

Whilst you will be charged interest, this way you get to keep your policy and additionally the cash value and the death benefit aren’t reduced (as long as you repay the loan). This means you can still earn interest or invest the whole cash value and still earn tax deferred income on that amount. Usually there is no requirement to repay the loan. However, if you’ve chosen a volatile product such as variable whole life insurance and your cash value starts to plummet, then you will be required to keep up with premiums and pay the interest charges. If you pass away before repaying the loan, the death benefit is reduced by the amount of the loan and outstanding interest charges.

Borrowing from your life insurance policy can be a means of saving your policy but you shouldn’t set up the policy as a means of financing your retirement. There are alternative and better options for doing so.

Withdrawing from the Cash Account

Another option for accessing moneys is to make a withdrawal from the cash account. This will however reduce the cash value and the death benefit permanently. Some types of whole life insurance policies won’t let you make withdrawals. If you do have this right, make sure you research the tax consequences. Depending on how much in premiums you’ve paid and the amount you remove, you may need to pay income tax on the surplus. Most companies will charge you surrender fees (also called deferred sales charges). Also, you need to be careful not to withdraw too much, ask the policy may turn into a modified endowment contract (MEC) and you then lose some of the tax benefits associated with life insurance policies.

If you are in need of cash, try considering other options than surrendering your policy. You may also consider selling your policy to get a higher reward. However, by cancelling your policy, you are not only losing life insurance coverage but also all the additional payments you’ve made in those earlier years. Before committing to any decision, research the possible tax and other financial implications. It may be best to speak to an accountant first – it could save you thousands.