Do You Receive Money for the Cancellation of a Life Insurance Policy?
You may be considering canceling your life insurance policy for reasons such as reaching retirement age and no longer needing the coverage or as a way to obtain needed cash. Depending on the circumstances, you may receive some cash when you cancel, or possibly none at all. Viable alternatives to cancellation may also be available.
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Return of Premium
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Term insurance is a type of life insurance that does not build cash value over time, so there is no cash to return to you if you cancel. However, you may be able to receive a partial return of your premium. For example, if you pay on an annual basis and you cancel six months into the term, you will receive some of the premium for the remaining six months. However, you should not expect to receive the full amount of the excess premium, since insurance companies typically assess surrender penalties for cancelling early.
Cash Value Policies
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Permanent life insurance policies such as whole life or universal life accumulate cash value, which you will receive when you cancel the policy. However, it can take several years to accumulate any significant amount of cash, so you will likely receive little or nothing if you cancel during the first few years. As with term policies, your insurance company will also assess fees and surrender charges, which will reduce your final amount.
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Life and Viatical Settlements
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Another way to receive cash is by a process known as a life settlement. With a life settlement, you sell your policy to a third party in exchange for an amount higher than the existing cash value but lower than the face amount, which is the amount of insurance your beneficiary would receive. The third party takes over the premium payments and becomes the beneficiary when you die. A viatical settlement is similar to a life settlement except that it occurs when a policyholder is terminally ill.
Ramifications
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In addition to losing insurance coverage and paying fees, there may be other ramifications when cashing in a life insurance policy. For instance, if the amount you receive is greater than the total amount of premiums you have paid over time, any excess amount is considered taxable income. As an alternative to cashing in a policy, you can consider taking out a low-interest loan against the cash value if you need money. The loan does not need to be repaid, although an outstanding balance at the time of your death will be subtracted from the policy's face amount.
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