Surrendering the Policy
What if you just want to stop paying your policy’s premiums? This might be the case if you find out you qualify for much cheaper term life insurance. Or maybe you are at the point where you no longer need life insurance coverage at all. In this case, surrendering your policy may be the best option.
With a term insurance policy, you can just stop paying the premiums to effectively cancel your coverage. Not so with a whole life insurance policy. You have to actually call your insurance company to cancel the policy.
If your policy has been in place long enough to accumulate some cash value, you can then get this back out of the policy. Of course, this doesn’t come without fees. You’ll need to check with your insurer on what fees you’ll pay.
And remember, if you stop paying premiums and cancel the policy, you’ll be without a death benefit. This would leave your family vulnerable if the worst were to happen. So your best bet is to either be in a place where you no longer need insurance or to switch from a whole life to a term life insurance policy.
Withdrawing from the Life Insurance Policy
With many whole life insurance policies, you can get back out a certain amount of money that you put into the policy. Remember, these policies are sort of like investment vehicles. And as with other investments, you can often get back out the amount you’ve paid in without paying additional taxes. However, if you dip into any of the account’s gains, you’ll pay taxes on the amount.
Policy withdrawals have different effects, depending on your policy. They could reduce your death benefit like a loan would. Again, be sure to check with your particular policy before making this type of decision.
Potential Fees and Other Gotchas
One thing to note when taking any of these steps is that the insurance company may impose fees, as noted in your contract. These can be quite hefty and may eat into the available cash you can get out of your policy. And if you withdraw money that was earned on top of your investments, you’ll most likely have to pay income taxes on that money, too.
Your best bet before making these decisions is to talk with a financial advisor who can give you the pros and cons of each option. But, ultimately, sometimes it’s best to just get rid of your policy and move into a term life insurance policy or no life insurance at all.
So When Should You Take the Cash Value?
If you’re planning to maintain your life insurance policy, your best bet is to refrain from borrowing or withdrawing from the policy unless absolutely necessary. These moves can put you in a financial bind or wear down the amount of death benefit available for your family should they need it. These moves are available if you need them, but try other avenues first.
But what if you no longer want or need to maintain the policy? Depending on your age and health, you can most likely get a term life insurance policy with the same death benefit for a much lower premium. You could cancel your whole life insurance policy, buy term coverage, and invest the difference in premiums–likely for better returns.
If you bought a whole life insurance policy you didn’t really need, don’t keep paying into it because you assume that’s the only option. Instead, price out term policies. If they turn out to give you more bang for your buck, it may be time to surrender that whole life policy. You can always invest the money from the cash value, getting better returns over time.
And what if you’re in a situation where you no longer need life insurance? If you have very little debt and no dependents, you may not need to maintain a policy at all. In this case, you shouldn’t keep paying for a whole life insurance policy unless it’s part of a well-considered estate plan. If you don’t need the policy anymore, call your insurance company to cancel it. Again, you can take the cash benefit your pocket and invest it for the future.
Whole life insurance policies are the best option for some people, especially those who will always have dependents due to disabilities and the like. But if you’re paying for an expensive policy you don’t really need, cashing out may be the best option, even if you have to pay fees and taxes. Just be sure you know exactly what those expenses will be before you initiate the process.
Finally, whole life and universal life policies can be extremely complicated. Any decision you make may have tax implications. The key is to seek the advice of a qualified life insurance specialist before making a decision.