Deciding whether to surrender a life insurance policy is a significant decision that many policyholders face. Life changes, financial strains, and shifting priorities lead individuals to question the necessity and affordability of their coverage. While surrendering your policy seems like a straightforward solution to immediate financial concerns, it’s essential to weigh the implications carefully. In this article, we will explore the reasons people consider surrendering their life insurance policies, the pros and cons of making such a choice, and alternative options that may better suit your needs. By understanding your choices, you can make an informed decision that aligns with your financial goals and the well-being of your loved ones.

What Does It Mean to Surrender a Life Insurance Policy?

When you surrender your life insurance policy, you are effectively cancelling the policy. As a result, your beneficiaries will no longer receive a death benefit once you pass. Instead, the policyholder (you) will be given whatever cash value amount is left, which is the amount you have built up over the life insurance policy’s lifetime. The amount you receive is subject to surrender fees, unpaid premiums, and federal income taxes. 

Why People Consider Surrendering Their Policy

Reason 1: Lack of Financial Stability

One of the most common reasons policyholders surrender their life insurance is due to decreased financial stability. Rather than take out loans or pursue financial assistance elsewhere, surrendering their life insurance policy serves as a quick method to grow their finances with little consequence. When people are struggling to afford day-to-day expenses, they often choose to surrender their life insurance in favour of getting a boost in their income.

Reason 2: Changing Financial Priorities

As life goes on, an individual’s circumstances can change drastically. Life events such as marriage, divorce, or having children causes many policyholders to reassess their life insurance needs. They may find that they no longer require the same level of life insurance coverage as they once did. 

Reason 3: Cost of Life Insurance Policy

Due to changing financial circumstances, many policyholders will surrender their life insurance due to their premiums being too high. If they believe they can no longer afford the ongoing payments, surrendering the policy is a more cost-effective option. 

These three reasons are the most common, but there’s a myriad of other reasons someone will surrender their life insurance, such as:

• The policy not performing as expected in terms of cash value growth
• The investment options within a policy not yielding adequate returns
• Replacing their current life insurance policy with a new one
• Feeling like they no longer require life insurance coverage
• The policy lapsing as a result of missed payments

Pros & Cons of Surrendering Your Life Insurance

Pros of Surrendering Your Life Insurance

• Immediate cash for covering urgent financial needs, debts, or major expenses.
• Eliminates the financial burden of paying life insurance premiums regularly.
• Simplifies finances, making them easier to maintain and manage.
• Avoids potential policy lapse and the fees associated with it if you aren’t able to pay the premium.

Cons of Surrendering Your Life Insurance

• The policyholder will lose the death benefit, leaving dependents or beneficiaries without financial protection.
• Upon surrender, the cash value of the life insurance policy will be taxed accordingly.
• Due to changes in health status, it may be difficult or more expensive to receive coverage in the future.
• The policyholder will miss out on future growth in cash value or dividends for the policy once surrendered. 

Alternatives to Surrendering Your Life Insurance

• Reduced Coverage Amount: If your premiums are too high, but you don’t want to lose coverage entirely, you can reduce the death benefit amount. By doing this, you maintain a level of life insurance protection but with lower premiums to make it more affordable and manageable. 
• Policy Loans: Permanent life insurance policies have a cash value that can be borrowed against. You’ll be able to immediately access funds accumulated in the policy without eliminating your policy entirely. Keep in mind that the loan must be repaid with interest.
• Convert to a Paid-Up Policy: Many life insurance policies offer the option to convert the policy to a paid-up status, where no further premiums are required. The death benefit is reduced based on the premiums already paid and the cash value accumulated.

Explore Your Options with HealthQuotes

Surrendering your life insurance policy is a difficult choice to make, especially if you are still intent on leaving money for your beneficiaries once you pass. Our expert insurance agents have worked with many individuals in your situation, we can help you explore available alternatives. By sharing your needs and preferences with us, we’ll guide you towards options that fit your goals, ensuring you don’t leave with any regrets. Ready to get started? Contact us today!

Related

What Happens If I Lie on My Health Insurance Application?

2025 Tax Credits for Medical Expenses in Canada

Which Vaccines Are Covered by OHIP: A Complete Guide