Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Life Insurance Policy

Surrendering a life insurance policy means canceling the coverage and receiving any cash value that has accumulated since the policy was issued. You will be required to pay income tax on any increase in value of the funds that make up the cash value connected with it.

When an insurance policy is surrendered, the former policyholder gives up the protection for his or her loved ones that go with having a life insurance policy in place. A person who has an insurance policy in place who wants needs to access cash has other options other than surrendering the policy entirely.

Before you surrender a life insurance policy be sure that you know exactly how much life insurance coverage you need and how to find the cheapest rates. Just enter your zip code in above for a free insurance comparison!

Cash Value in a Life Insurance Policy

When an insurance policy customer buys a universal life insurance policy, part of the premium is used to pay for the cost of insurance. The other portion is invested on the insured’s behalf. The customer will have a choice about the type of investment, and he or she can choose to invest them in a variety of investment products, if desired.

The insurance company representative can explain the different options available, as well as provide the customer with a prospectus for various options. The customer can choose to invest in stocks, bonds, mutual funds or a combination of these investment options.

These investments make up the cash value of the insurance policy. The policyholder is entitled to receive these funds when the policy is surrendered. If the policy has not been in force for long, the insurance company may charge a surrender fee when the customer wants to cash in the policy.

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Withdrawing Funds from an Insurance Policy

An alternative to surrendering the insurance policy is to ask about the option of withdrawing funds from the cash value of the insurance policy. The amount that would be available for this purpose depends on the cash value within the policy, as well as the insurance company involved. Each one is free to set its own company policies about what percentage of funds accumulated in a policy that accumulates cash value can be accessed without having to surrender the policy entirely.

A policyholder who is considering withdrawing a portion of the cash value accumulated within the insurance policy needs to ask whether doing so will reduce the amount of the death benefit payable under the policy. Another thing to consider before withdrawing funds from an insurance policy is whether the amount withdrawn will be subject to income tax.

If the funds are taken out within the first 15 years after the policy was issued, they may be partially or fully taxable. A policyholder would be wise to consider the consequences before deciding to approach the insurance company about withdrawing the funds.

The premiums may increase if part of the cash value contained in the policy is withdrawn. A company representative will be able to advise whether this is the case, as well as what the new rate will be.

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Borrowing Against the Cash Value

Some policyholders may wish to take out a loan using the accumulated cash value in the policy as collateral. A person who chooses this option will not have to show that he or she qualifies for the loan before being able to have the funds advanced. The amount of money available will depend on how much is sitting in the cash value portion of the policy.

As in the case of a partial withdrawal of funds from the cash value of an insurance company, taking out a loan using the cash value as collateral will reduce the death benefit payable under the policy. If the loan is not fully paid off when the policyholder wishes to surrender the policy or if it lapses due to non-payment, the amount of the loan may be taxable.

When an insurance policy is surrendered, it is canceled at the request of the policyholder. At that point, he or she no longer has life insurance coverage. Any cash value accumulated while the policy was in force will be refunded to the customer, less any surrender fees.

Other options are available to a person who has an insurance policy with cash value who is looking to gain access to the funds. He or she may be able to take out a portion of the funds or borrow against the insurance policy by using the cash value as collateral. Before making a final decision, the insured should ask the insurance company about options, as well as what the tax consequences of each one would be.

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