Maybe you bought your life insurance years ago for the death benefit, but times have changed. As you navigate retirement — and life without a paycheck — you may prefer to use your life insurance for yourself, as a source of cash to strengthen your finances. You can tap into that cash in a few different ways, but two common methods are surrendering your coverage back to the insurance company or selling it to a third party through a life settlement.
In personal finance, the right strategy is often different for everyone and highly dependent on individual circumstances. The choice between surrendering and selling life insurance, however, is not situational at all. Selling your life insurance is invariably the better choice. Read on to find out why.
What does it mean to cash out your life insurance?
When you cash out life insurance, you give up your policy and its death benefit in exchange for a lump sum of cash. You are essentially recouping some of the funds you’ve invested in policy premiums over the years. Surrendering your policy and selling your policy are two different methods for cashing out life insurance.
What is surrendering your life insurance policy?
Surrendering your policy effectively 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 balance in your policy’s cash value account, minus any surrender fees.
Older policies generally have higher cash surrender values. There are two reasons for this. First, cash value in life insurance builds slowly at first, and picks up momentum over time. In the first 10 years of the policy, you may see little movement in your cash value balance. But after 20 or 30 years, the balance grows much faster.
Second, surrender fees are usually high in the early years of the policy and then gradually phase out over time. On a young policy, the low cash value balance combined with high surrender fees makes for a small or even nonexistent cash surrender value. An older policy, though, should have a higher cash balance and lower surrender fees — summing to a higher cash payout when you surrender.
Pros and cons of surrendering your life insurance policy
Surrendering your life insurance provides easy and fast access to cash. Your insurer will likely take your surrender request over the phone and send you a check within days. Your cash surrender payment will be far less than what you’ve invested in premiums to keep the policy active, but something is better than nothing.
The downside of surrendering your policy is that you must accept your insurer’s estimation of that policy’s value. Think of this like trading in a car at a dealership. The dealer tells you what the car is worth. If you accept the dealer’s trade-in value, it’s only because that’s your most convenient option. You know the car is worth more if you market it directly to private party buyers. That is to say, the benefit of surrendering your life insurance is that it’s a fast and easy way to recoup some money when canceling coverage — the downside is that you’re leaving a significant amount of money on the table as opposed to selling it.
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.
The buyer is an investor who generally has to be licensed to purchase life insurance. In most U.S. states, the sale of life insurance is a regulated transaction — which is a good thing, because it protects all parties, including you, from fraud.
From start to finish, the sale of your life insurance can take two to four months. The starting point is connecting with a life settlement company or broker who can market your policy to multiple buyers. Assuming you’re working with a full-service life settlement partner, you don’t have to do much other than authorize the release of your medical records and then review the bids on your policy.
In between those two steps, several things happen the scenes. For example, your life settlement team will create a package of information that’s important to prospective buyers, including longevity estimates produced by life expectancy underwriters. Your broker will reach out to a network of buyers to set up a competitive bidding auction for your policy. The broker then manages several rounds of bids and negotiations to get to the highest possible offer.
Once you accept the highest offer, you complete some paperwork to notify your insurance company and finalize the sale. You then receive the net cash proceeds and the buyer takes over your policy. When you pass away, the insurer pays out the death benefit to the buyer.
Who can you sell your life insurance to?
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 create a competitive bidding environment for your policy among a network of premium buyers. That drives the price up. If you work directly with a single buyer, there’s no competition and no reason for that buyer to put forth a strong offer.
Harbor Life Settlements is a life settlement company that can manage this process for you, from underwriting your policy to working with our broker-partner Harbor Life Brokerage to secure competitive offers from the industry’s top buyers.
Why selling your policy is better than surrendering 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 — usually two to four times more. 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.
Outside of the cash proceeds, selling and surrendering your life insurance have similar outcomes. Both transactions leave you without any future premium payments. Both transfer the death benefit away from your chosen beneficiary. And both should provide you with cash that you can use for any purpose, without affecting your home equity or increasing your debt.
The core difference is that selling your policy results in a much higher value, which is why it is the best method for cashing 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.
Find out how much your policy is worth.
Maximize the value when cashing out your life insurance policy
If you are considering cashing out your insurance, we strongly recommend selling it over surrendering it to ensure you get the highest value for your policy.
Harbor Life Settlements can review your policy details and provide a free estimation of its value. Even if you’re not sure you want to sell, you should take this step before surrendering your policy. That way, you can compare your options based on the numbers.
If you have questions about life settlements or your policy’s value, contact Harbor Life Settlements today to learn more.