What Happens to the Cash Value if I Surrender my Whole life Insurance Policy?
If you decide to surrender your whole life insurance policy, the following typically occurs regarding the cash value:
1. Surrender Value
Definition: The surrender value is the amount you will receive if you cancel or surrender your whole life insurance policy. It is generally the cash value of the policy minus any applicable surrender charges or outstanding loans.
2. Surrender Charges
Early Years: Most whole life policies have surrender charges, especially in the early years of the policy. These charges are designed to recover the insurer’s costs associated with issuing the policy. Surrender charges usually decrease over time and eventually disappear after a certain period.
Impact on Cash Value: Surrender charges will reduce the amount of cash value you receive upon surrendering the policy.
3. Outstanding Loans
Loan Repayment: If you have taken out any loans against the cash value of your policy, the outstanding loan amount and any accrued interest will be deducted from the surrender value.
Remaining Amount: The remaining amount, after accounting for loan repayments and surrender charges, will be given to you.
4. Tax Implications
Taxable Income: If the cash value received upon surrender exceeds the total premiums you have paid into the policy (your basis), the excess may be subject to income tax. This is considered taxable income.
Form 1099: The insurance company will provide a Form 1099-R for tax purposes, showing the amount of the distribution and any taxable portion.
5. Policy Termination
Loss of Coverage: Surrendering the policy means you will lose the death benefit coverage, and the policy will be terminated.
Future Financial Planning: You will no longer have the lifelong protection or any future benefits that the policy might have provided, including the cash value accumulation.
6. Alternatives to Surrendering
Policy Loan: Instead of surrendering, you might consider taking out a loan against the cash value. This allows you to access funds without terminating the policy.
Reduced Paid-Up Insurance: You might be able to convert your policy to a reduced paid-up insurance policy, which will reduce the death benefit but maintain coverage with no further premiums.
Partial Withdrawal: Some policies allow partial withdrawals from the cash value, providing access to funds while keeping the policy active.
7. Consultation
Infinite Banking Practitioner: Before surrendering a policy, it’s wise to consult with your Infinite Banking Practitioner. They can help you understand the financial implications, including tax consequences, and explore alternative options.
Surrendering a whole life insurance policy can be a significant decision with financial implications. Understanding the surrender value, associated charges, and tax consequences will help you make an informed choice.
