Should i surrender my whole life policy

However, while permanent life insurance does produce some positive rate of return, the net return is often fairly mediocre after expenses - especially as the cost of insurance rises for policyowners in their later years.

In fact, for many universal life policies, the net return can even be negative - in other words, the insurance charges actually deplete the policy faster than the growth increases it, introducing the risk that the policy will lapse unless higher premiums are paid.

For whole life policies, by definition of the policy structure, payment of the premium is guaranteed to keep the policy in force and the cash value increasing, although the net return may still be extremely low. However, the prospective return characteristics of life insurance policies are different when accounting for the death benefit. When a policy is held until death, the net proceeds to the beneficiaries immediately step up to the death benefit value, which can provide a significant internal rate of return.

Of course, the incredibly high return in such a scenario cannot accrue to everyone, or the insurance company would go out of business! Instead, the reality is that the potential to receive a death benefit after only one premium payment is offset by the fact that some people will live far beyond their life expectancy, making a large number of payments - and allowing the insurance company to further grow their premiums - before ever paying a death benefit.

This is the fundamental benefit of risk pooling inherent in life insurance; the increased payments for those who don't make it to life expectancy are offset by those who outlive life expectancy, and the average policyowner earns the average return by living to the average life expectancy.

Editor's note: Technically, this equation is adjusted slightly for policy lapse rates, and the overhead costs of the insurance company. While the average policyowner merely earns the average return, the reality is that the average return at the average life expectancy can actually be a pretty appealing rate of return in today's environment. Insurance companies invest the majority of their premiums in bonds, and build enormous bond ladders to help manage their expected death benefit payments which, spread over a huge base of insured individuals, becomes remarkably predictable based on the law of large numbers.

As a result, the pricing and internal rates of return on the policy - or more accurately, the balance between the required premium and the anticipated death benefit - are heavily supported by interest rates at the time the policy is issued.

In turn, though, this also means that for existing policies, the internal rates of return tied to the death benefit tend to be related heavily to interest rates at the time of issue - which presents a significant opportunity given the recent decline in rates, as "old" policies may be priced based on bonds that are far more appealing than today's available rates!

A real-world example may help to illustrate. Barbara is a widower client who came in a few years ago to review an existing universal life policy that was issued back in Barbara was able to get coverage, despite being 59 and in relatively poor health, although it was issued with a Table F rating.

And of course, the charges continue to grow higher under the universal life policy as Barbara ages; within 6 years, the charges will be greater than the total of premiums plus growth, and the net cash value will start to decline every year. The policy is projected to lapse in 19 years when Barbara is The caveat to Barbara's strategy, though, is that she remains in poor health. While the policy is scheduled to lapse when she turns 89, the life expectancy of even a health 70 year old woman is only about 16 years, and Barbara's life expectancy is even shorter, due to her health conditions.

Over a year time horizon, that's a whopping Even if Barbara lives to an average life expectancy, the internal rate of return is still 5. Price differentials will vary according to age and coverage amount. This cost differential makes whole life far less attractive to the majority of individuals with an insurance need. For whole life, there are a variety of other features and provisions that can affect costs as well, such as:.

With term life insurance, if you no longer have a need for insurance, you can simply stop paying. Once you stop, the policy lapses, and the insurance company will no longer pay any benefit if you pass away. If you stop paying, the cash value will be used to pay any premiums until the cash value runs out and the policy lapses. But there are alternatives to simply stopping payments.

Options vary depending on your plan but may include:. Cash surrender value: You can simply ask for the cash surrender value to be paid to you. This is the cash value minus the surrender charge. This action ends the insurance policy, so you should only do this if you no longer have a need for insurance, or have new insurance in place. This avoids any taxes and leaves you with some life insurance, but it may not be the full amount of coverage you need.

This is helpful for someone who wants to preserve some life insurance for a short period of time, but no longer has a need for whole life insurance. Given the expense of whole life insurance and that many people do not need insurance for their entire lives, it is often not the ideal product to purchase.

However, there are some specific situations where a form of permanent life insurance makes sense. Funding a trust: Permanent life insurance can be used to fund a trust that will support children after you die.

Some states have lower estate tax limits , so it may make sense for folks living in those states as well. Below are the biggest sellers of whole life insurance, in alphabetical order. The list is based on annualized premium in the first three quarters of , according to LIMRA, a research group for the financial services industry.

See our ratings to find the best life insurance companies. Whole life makes up over one-third of the individual life insurance market as measured by premiums paid. This is largely driven by its high cost. Here are questions and alternatives to help you decide if whole life insurance is right for you. The additional benefits offered by whole life can often be found by using your retirement and investment accounts for gains, in combination with a term life insurance policy.

Before purchasing any insurance policy, be sure to fully understand the options available, and the various provisions each policy comes with. First, determine how much life insurance you need. Most life insurance company websites have free life insurance calculators to help you figure how much coverage you need.

Generally, the calculators look at the financial obligations you want to cover if you died and the financial resources you currently have available. Once you have determined the life insurance amount you need, the next step is to compare life insurance quotes from multiple life insurance companies. Life insurance quotes will vary widely among companies. You can get free quotes online or work with an independent insurance agent who can gather quotes from multiple companies.

The key difference in term life vs. Both types of life insurance have their advantages and disadvantages. Term life insurance is good for people who want a financial safety net for a specific number of working years, such as the years of paying off a mortgage. You can buy a term length such as 10, 15, 20 or 30 years. A small number of companies even offer year term life insurance.

Whole life insurance is good for people who want lifelong coverage and to build cash value. Most universal and whole life insurance policies have a cash surrender value, but term life policies do not. Term life insurance policies do not have an investment portion. When you surrender your term life policy, the company will cancel your plan but you will not receive a payment. Can I cancel a whole life policy? Yes, you can. When you cancel whole life insurance, you gain the full amount of your investment, minus fees.

During the life of your plan, roughly one-third of your premiums go into this investment fund. Whole life investments are generally placed into high-interest bank accounts or investment accounts with minimal risk, so a return is more likely to be significant.

Universal life insurance policies have a cash value component. When you surrender one of these policies, you will be given the sum of your investment account minus any surrender fees that the insurance company has. Universal life investments are generally placed in market-dependent investment accounts. These accounts have both higher risk and higher potential gains than whole life investments, which means your payout amount is not guaranteed to accumulate and be valued at a set rate each year.

People who no longer need their life insurance policy, or who have immediate financial needs, should consider surrendering it. Depending on the circumstances, surrendering your life insurance policy can be helpful. There are a handful of reasons to surrender your life insurance.

The third common reason for surrendering life insurance is to gain the cash surrender value of your policy. This final reason only works with life insurance policies that have a cash value factor built in. The first example of switching jobs is an excellent reason to surrender a policy. The second example of no longer wanting the death benefit is another good reason to surrender a policy. The third example is more of a gray zone. Surrendering your policy purely to obtain the cash surrender value can be a bad idea.

Life settlements can net more money, while policy loans can provide immediate cash without canceling your life insurance. If you could still benefit from your life insurance policy, then surrendering it purely for the cash surrender value may not be your best option.

Policies with cash value—most types of permanent life insurance—have some rules about when you can surrender them. Most of these policies will have both surrender periods and surrender fees. Surrender fees are charges taken from the cash value of your plan upon surrendering it. Surrender periods are discussed in detail below, but relate to how long a policy must be active before it can be surrendered.

The longer a policy is active and the more premiums that are paid into it, the larger its cash value will be.