Alternatives to Surrendering Life Insurance Policies for Seniors

For seniors who don’t have children or other dependents to support, paying premiums for a life insurance policy could seem less important than it was in the past.

When choosing an amount and type of life insurance, people typically consider the potential financial loss put into motion upon their death. For example, loss of future income when a spouse or parent dies is a serious concern for families with young children.

A life insurance policy that was a good fit 30 years ago may no longer be the right choice if the kids are financially self-sufficient and the policy owner would like to save money for rising healthcare costs, travel, or just add more money to their bank accounts.

A life insurance policy represents a significant financial investment. Whole life insurance policies, including universal or permanent policies, accumulate cash value over time. People who own these types of life insurance policies can even take out loans against the value of the policy.

Surrendering a life insurance policy

Seniors may choose to surrender their life insurance policy in exchange for cash from the life insurance company. In many cases, it’s possible to surrender a life insurance policy for its cash value 15 years or more past the policy initiation date.

To find out about how much money a policy is worth upon surrender, the policy owner can look at the most recent insurance statement. The “available partial surrender value” rises with each premium payment. It offers a ballpark figure of what the policyholder could expect to receive if they decide to surrender the policy.

The surrender charges vary from one life insurance company to the next and usually decrease as the policy ages. In many cases, the surrender charge expires when a policy reaches its 15th year. This rule varies, so it’s best to check with the insurance company.

Seniors who no longer want to pay the premiums on their life insurance policy, who don’t need the policy, or who would like to get cash from their policy before the insured event occurs have several options other than surrendering the policy.

Many life insurance policies lapse

Some insurance industry studies claim that as much as 80% of life insurance policies lapse before they pay out. Whole life insurance policies have a 12% lapse rate in their first year and 10% in their second year.

When policies lapse due to non-payment or proactive cancellation by the owner, the insurance company isn’t under any obligation to refund premiums. If cash value has built up inside the policy, the insurance company must surrender it to the policy owner. The life insurance company will subtract any early termination or surrender fees automatically.

Lapsed policies typically have $0 value, however. All premiums paid into the policy belong to the insurance company. There is no payout when the insured event occurs.

Life Settlements offer more cash than policy surrender for seniors

Life insurance policy owners who are over the age of 65 are eligible for a life settlement. This alternative to letting a policy lapse or surrendering the policy pays more than either option and terminates the policy owner’s obligation to pay premiums on the policy.

When a senior participates in a life settlement, they receive a cash amount minus the transactional fee, which may be as much as 30% of the total amount. Even so, the net life settlement amount is more than the cash surrender value of the policy.

In a 2014 study conducted by the London Business School, Americans who sold their life insurance policies collectively received four times the amount of the cash surrender value.

The amount of a life settlement depends on the size of the policy, the age and health status of the insured person, and the premium cost. Larger policies are worth more, of course. For example, a $100,000 whole life insurance policy with a $4,000 annual premium when the insured person has a 10-year life expectancy is about $20,000.

The insured person has a chance to carefully review the settlement offer, compare offers from different investors, and consult their financial advisors before deciding whether to sell their life insurance policy for cash.

Life insurance is a misunderstood financial asset

The retirement planning industry spends a great deal of time and energy discussing traditional assets like 401k plans and mutual funds. Conventional investments are important as part of a retirement plan, but life insurance often represents a great value to seniors who need money to cover rising health care costs or want to pad their savings account.

While there are many variables that influence how much money a life insurance policy may be worth in cash, it’s important for seniors to understand that surrendering or allowing their life insurance policy to lapse aren’t the only choices.

The Life Insurance Consumer Disclosure Model Act, adopted by the NCOIL in 2010, states that senior policyholders on the verge of a life insurance policy lapse or surrender should receive written notice from their life insurance company about options including lapse, surrender, and life settlement.

Some states, including Oregon, Washington, Wisconsin, Maine, New Hampshire, and Kentucky have adopted the Life Insurance Consumer Disclosure Model Act to make sure that their citizens are well informed about their choices.

Talk to your accountant before making a final decision

Policyholders must pay income taxes on the money they receive that exceeds the amount of premiums they paid. The tax implications of surrendering a life insurance policy vary according to the individual’s financial situation. It’s a good idea to seek the advice of a trusted tax professional before deciding what to do with an unwanted life insurance policy.

Before deciding about whether to let a life insurance policy lapse, surrender it for the cash value, or participate in a life settlement, gather as much information as possible.

Understanding the options and the financial implications of each helps seniors and their families make the best decision for their individual situation.