Why You Should Sell, Not Surrender Your Life Insurance Policy

cash out instead of surrender life insurance

While most people buy life insurance to create a financial safety net for loved ones, your situation may change and there may come a time when you no longer need or want coverage anymore. Surrendering a life insurance policy is one way to get money back from it, as you can get your cash value minus surrender fees and taxes.

In this post, we’ll explain how surrendering a policy works and how to decide if you should do it. We’ll also explain why selling the policy is generally a better option, as it can result in a return that’s 4 to 11 times higher than the cash surrender value.

What is surrendering a life insurance policy?

Surrendering your policy cancels your life insurance immediately. Your insurer will terminate the coverage and send you a check for the policy’s cash surrender value. Cash surrender value is the money a life insurance policyholder receives for ending their coverage before the policy’s maturity date or before they pass away, minus any surrender fees and taxes on earnings.

The cash surrender value differs from the policy’s cash value, which is total sum in the savings component of permanent policies like whole and universal life insurance. The value differs because of surrender fees, which typically range from 10-35%. Surrender fees are usually high in the early years of the policy and then gradually phase out over time. Most policies also have a waiting period of at least 15 years before you have the option to surrender it.

What happens when a policy is surrendered?

When a policy is surrendered for its cash value, you’ll lose coverage and no longer be responsible for paying insurance premiums. You may have to pay surrender fees for canceling your coverage early, which will be deducted from any cash value your policy has or paid out of pocket if you have a term policy. You may also have to pay taxes on the surrender value if earnings exceed the amount you’ve paid into the policy.

For example, someone who’s paid $20,000 into a policy through premiums but has a cash value of $30,000 will need to pay taxes on the $10,000 in earnings over what was paid in. The amount of taxes you’ll pay depends on your income bracket, but let’s say 22% which would equate to $2,200. That means your cash surrender value would be $27,200 before fees, which range from 10-35% of the policy’s cash value. Assuming surrender fees are 20%, that would be another $5,440 that gets taken out, leaving you with a final cash surrender value of $21,760.

Reasons for surrendering your life insurance policy 

Each person’s situation is different, but the most common reasons for surrendering a life insurance policy include:

  • No longer need coverage: Life insurance can help provide for your loved ones when you pass away, but coverage may not be necessary after children are grown up and independent.
  • Costs: Insurance premiums are expensive and can become unaffordable over time. Surrendering means you will no longer need to keep paying premiums and can use that money for other needs.
  • Better policy: You may find that a policy you purchased in the past is no longer a good fit for your current needs, so you can surrender it and get a new policy that offers better coverage or cheaper premiums.
  • Cash needs: If you’re urgently in need of cash, surrendering your policy will award you a lump-sump. However, you may also be able to get cash through other methods like selling, which can award a higher payout.
There are several reasons why someone might surrender a policy, but it has major implications. You’ll receive a large payout and no longer have to pay premiums, but will also lose coverage unless you replace it with a new policy.


Pros and cons surrendering your life insurance policy 

Surrendering a life insurance policy is a life-changing decision that affects you and your family, so you should carefully the pros and cons of this option:


  • Easy and fast: Surrendering your policy is a simple and quick process, just tell your insurance company that you’d like to surrender and let them work out the details of your policy to determine the cash surrender value you’ll get back. There’s no negotiation or middleman, the insurance company will give you an offer and you can choose to accept it and surrender, or reject and continue coverage.
  • Get some money back: Surrendering your policy means you’ll get some money back, which is better than getting nothing. Some people may lapse their policy by choosing not to pay, but surrendering is a better option than this because it returns some value.


  • Minimal return: Surrendering your policy means you’ll only get one offer from the insurance company, and their goal is to give you as little money as possible. On the other hand, selling a policy through a life settlement means you can present your policy to multiple buyers and get several bids which drives up the price. In fact, life settlement brokers work on commission — so their goal is to sell your policy for as much as possible which means a higher payout for you and them. For reference, selling a policy can result in a value 4 to 11 times higher than the cash surrender value. If you’re interested in finding how much you can sell your policy for, get a free estimate from Harbor Life Settlements today.
  • Surrender fees: Insurance carriers often charge fees for surrendering a policy, which will come out of the cash surrender value you’d get back. These fees can be up to 10-35% of the proceeds you’ll get, depending on when you surrender it.
  • Limited options: When surrendering a policy, the insurance company will give you a take it or leave it offer. There isn’t room to negotiate, you can either accept it or reject it. These limited options aren’t in your best interest, as you’ll find more flexibility by taking your policy to the open market where you can get several offers through a life settlement.

Should you surrender your life insurance policy?

In short, it’s not advisable to surrender a life insurance policy because selling it yields a far greater value. Surrendering a policy is essentially leaving money on the table, so if you’re considering this option — it’s at least worth looking into selling as an alternative to see how much money you could get through a life settlement. We’ve provided additional information about selling your policy below, but you can also get a free estimate or contact us to learn more. 

What does it mean to sell your policy?

The process of selling your life insurance is known as a life or viatical settlement, and it essentially involves you exchanging ownership of the death benefit to a third-party buyer for a lump cash sum. You receive a large amount of money and are no longer responsible for paying insurance premiums, and upon your eventual passing, the buyer collects the death benefit associated with your policy.

You can sell your life insurance directly to a provider, but this limits the value you get because you only get a single offer. On the other hand, working with a broker generally produces a higher cash payout because they’ll present your policy to several buyers and create a competitive bidding environment that drives up the price. As a result, selling a policy typically yields a much higher payout than surrendering it.

Should you sell your policy or surrender it?

Selling your policy is better than surrendering it because the cash proceeds in a sale are much higher. Your policy’s value on the secondary market is always more than its cash surrender value — five times more on average according to a survey of 3,079 life settlement transactions by LISA. In some cases, the sales price can be as high as 60% of the policy’s death benefit. 

This makes sense because surrendering your policy to the insurance company means you only get a single offer resulting in a lower value. On the other hand, selling it enables you to seek multiple offers and negotiate so you get the highest possible value for your policy.

The core difference is that selling your policy results in a much higher value, which is why it is the best method for cashing out your life insurance. If you’re interested in selling your policy but aren’t sure where to start, contact Harbor Life Settlements. We’ll answer all of your questions, guide you through the process, and provide you with a free cash estimate on the value of your policy. If you choose to work with us, we’ll help you get the highest cash value for your policy while taking care of all the work so the process is as easy as possible for you. You can also use our life settlement calculator to instantly see how much your policy is worth.

Find out how much your policy is worth.

Avery Logan

Avery Logan

Avery Logan is a writer for Harbor Life Settlements with expertise on insurance, finance, and senior care. He specializes in breaking down complex subjects in a way that's easy for people to understand so they can feel informed about what they're reading.

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