Life insurance policies are a way to provide financial security for beneficiaries (family, businesses, etc.) after the policyholder’s death. However, sometimes life happens, and a policyholder needs financial security during their lifetime, too. A partial surrender of life insurance is one way to help offset sudden financial needs. This article covers what a partial surrender of life insurance means, why people use this option, and how to start the process.
Quick Takeaways
- A partial surrender (as opposed to a full surrender) returns part of your life insurance to the life insurance company for a specified amount of money
- You will lose a portion of the cash value of your life insurance policy, often some of the death benefit too
- The type of policy you have will play a part of how much cash value your insurance holds
- You can specify the partial surrender amount
- There may be partial surrender charges
- Speak with your financial advisor about any tax consequences
Table of contents
- Quick Takeaways
- Explanation of Partial Surrender of Life Insurance Policy
- Why Policy Owners Choose to Make a Partial Surrender
- How a Partial Surrender Works
- Using a Life Settlement as an Alternative to a Partial Surrender
- What is your Life Insurance Policy Worth?
- How Abrams Insurance Solutions Can Help
Explanation of Partial Surrender of Life Insurance Policy
A partial surrender of life insurance is when the policy owner withdraws a portion of the policy’s cash value. Sometimes this process is also called a partial withdrawal. Note that only a permanent life insurance policy has cash value. Term life insurance (in the vast majority of cases) does not. Typically, if your policy has cash value, it’s a whole life policy or universal life insurance policy.
Cash value consists of a portion of your premiums which accumulate and grow over time. Depending on your policy, it may grow rapidly with interest, grow slowly based on company profits, or even lose value if it’s directly invested in the stock market.
When someone does a partial surrender, they’re getting a part of this cash value that has built up while keeping their life insurance contract in place. However, the partial surrender can reduce the death benefit as well as the cash value. But because the policy remains in place, as the financial situation improves, the policyholder can rebuild the cash value and potentially the death benefit over time.
For example, a policyholder might choose to surrender a portion of their life insurance if they’re facing financial stress, such as medical bills or a leaking roof. They get their roof repaired and then let the cash value build back up as they keep paying premiums.
Ultimately, using a partial surrender can be a positive solution for someone facing financial hardships. It allows policyholders to access funds while keeping their life insurance protection intact.
Why Policy Owners Choose to Make a Partial Surrender
When deciding on making a partial surrender, getting the assistance of a financial professional can be helpful in weighing the benefits and implications. These are the most common reasons we see for a partial surrender of a policy.
Financial Hardship
When other sources of liquidity may not be available, or the cost of borrowing money is too high, a partial surrender can be a good solution to financial stress. We’ve seen partial surrenders help families with tough life events, such as the loss of a job or medical bills.
Choices on how to overcome obstacles like this are tough. So, it’s also important to remember that financial hardship doesn’t define a person’s worth. Most successful people have had financial struggles at one point or another and overcome them.
Need for Cash
Sometimes, diminishing the current value of life insurance can provide the leverage for a financial advantage. The ability to tap into the cash value of a policy can provide much-needed peace of mind, too. Some opportunities that benefit from tapping into a source of cash are:
- Financing a child’s education
- Down payment on home
- Investing in a business opportunity
A partial surrender can help families take advantage of opportunities without taking on debt.
This is actually a variation of a common life insurance strategy. Using an indexed universal life insurance policy, a policyholder can grow the cash value without losing money (downside protection) and then use policy loans to invest in other income streams or pay for expenses.
Click here to read more on how to use an IUL as a no-questions-ask loan or even a retirement income supplement.
Premium Payment Difficulties
Increasing cash flow is one way to help with financial strain in times of need. Reducing premium payments through a partial surrender can free up some cash while still keeping the policy in force.
Partial surrenders are not the only option if you need to reduce your premiums temporarily. Sometimes, you can also use the cash value to pay premiums. It won’t work indefinitely, but if you’re in a tight spot for a few months, it can help and keep that policy building.
How a Partial Surrender Works
The partial surrender process is straightforward.
Step 1: Contact your insurance company or agent to get the details on how your insurance company handles surrenders. The agent/company will likely ask how much you want to surrender and give you information on how much of your policy will remain. The full amount of surrendering your policy is called the cash surrender value.
Step 2: Submit the request for partial surrender. Here, you’ll specify the amount you wish to withdraw. The insurance company then processes the paperwork and sends you a check or direct deposit.
In determining the amount you want, make sure to talk to your tax advisor to see if there are any tax implications through doing a surrender. If you choose to take a policy loan instead, those are tax-free.
There are a few important notes about life insurance cash surrender values to be aware of. You need to have built up some life insurance cash value to do a partial surrender. In most cases, the insurance company will require you to have paid off any life insurance policy loans. There might also be a partial surrender charge. That’s a fee for going through the processing.
Using a Life Settlement as an Alternative to a Partial Surrender
A partial surrender is one way to access part of the cash stored in your life insurance contract. Another way is through a life settlement. This alternative can provide more cash in the right circ*mstances.
A life settlement is a way for a policyholder to access more cash than even a full policy surrender. Although it’s almost always less than the death benefit pays the beneficiary.
In a life settlement, the policy owner sells the contract to a third party for immediate cash. The buyer becomes the new owner and is then responsible for paying the premiums going forward.
To learn more about life settlements, read this article on what to do with a life insurance policy you don’t need.
Why Consider a Life Settlement?
Let’s start with the typical qualifications. Anyone can do a partial surrender as long as they’ve built up some cash value. But life settlements have a few more requirements.
- Over age 65
- Death benefit of at least $100,000 (in most cases)
- Permanent policy or a term policy with a conversion option
- Declining or poor health
Life settlements offer greater financial returns. A life settlement can get someone more cash than a partial surrender. This is doubly true if the person is older or in poor health. It is also good for policy with a high benefit but a low cash value, like many whole life contracts.
Unwanted or unneeded life insurance policies. If beneficiaries don’t need the cash from the policy’s death benefit or it would help the family more to have the cash now, the larger lump sum of a life settlement can provide financial advantages over a partial surrender.
Doing away with high premiums. Even with a partial surrender, the policyholder still needs to pay premiums to keep their life insurance. If the life insurance premiums are too much, even at the reduced rate of partial surrender, selling the policy through a life settlement can give the policyholder cash and free them from the premium payments entirely.
What is your Life Insurance Policy Worth?
How Abrams Insurance Solutions Can Help
How much you’ll get for either a life settlement or a partial surrender will depend on your policy type, the insurance company, the cash value, the death benefit, and your age. Fill out the life settlement quote form on this page to get an estimate of your policy’s value. Or, give us a call at (858) 703-6178 to get a value for your policy and to find the best option for your financial situation.
