Other

Surrendering a Life Insurance Policy – Henssler Financial

Under 26? Youve got health insurance options

When a life insurance policy is surrendered, the owner cancels the policy for the “non-forfeiture value,” a predetermined sum of money (the surrender value). After paying the surrender value, the insurance company that provided the coverage is no longer required to provide life insurance benefits to the (former) policyholder. that is, by giving up a life insurance policy, the policyholder gives up all rights under that policy, including any death benefits payable under the policy.

Tip: Life insurance comes in two basic forms: cash value (permanent) and term. By its very nature, term insurance is temporary and typically does not build cash value. Since term life policies generally have no surrender value, they will not be discussed here. any additional mention of life insurance in this article refers to cash value life insurance.

Reading: What is partial surrender of life insurance

how the delivery value is determined

surrender value is determined by adding accrued dividends and unearned premiums to the current cash value amount and subtracting any outstanding loans (or loan interest) and any surrender charges. To obtain the current surrender value or surrender charge, contact the insurer that issued the policy. Generally, the cash value will increase and the surrender charge will decrease as the policy expires. At some point, which can be 15 to 20 years, the ransom charge will usually go away.

delivery charge

The surrender of a life insurance policy usually comes with a price: it’s the surrender charge. The surrender charge is the fee or penalty the policyholder agrees to pay for canceling the policy early. it is a predetermined amount that is usually calculated as a percentage of the cash value portion of the policy. the formula for calculating the surrender charge is found in your policy. Before you deliver a life insurance policy, discuss all options with a qualified insurance professional and/or tax professional.

Why give up a life insurance policy?

Just as there are many reasons to buy insurance, there are many reasons to forego it. The reason for giving up a life insurance policy is usually simple: to get access to cash. Whether the money is needed to pay for health care expenses or to build an addition to a home, foregoing a life insurance policy is a way to free up funds quickly.

See also : What is Bond Insurance and How Can Benefit Your Business | Gebhardt

many people choose to redeem a policy when the reason they bought life insurance no longer exists. For example, parents often purchase life insurance to ensure their children have financial support in the event a parent dies prematurely. however, once the children grow up and are on their own, the need for the insurance no longer exists (although some parents will keep the insurance to pass on an inheritance when they die).

A policyholder can also choose to drop a policy that no longer meets their needs, has become too expensive, or is not performing as well as other life insurance policies.

When replacing or exchanging one policy for another, it is possible to defer any taxable gains resulting from the delivery of the original policy.

reasons not to give up a life insurance policy

By giving up your life insurance policy, the policyholder gives up all rights under the policy, including your right to claim the death benefit. But even if the policyholder feels there is no current need for life insurance, he may have a future need for life insurance. if so, the ability to purchase a new policy will depend on the person’s circumstances at the time (eg, the person’s age and health status).

In addition, you have to take into account the surrender charges, which can be high in the first years of the policy, which causes the surrender value to be reduced. Finally, there are tax consequences to consider. If the surrender value exceeds the basis of the policy (premiums paid less any amount withdrawn), the difference (gain) will be subject to income tax, unless the policy is replaced or exchanged in a qualified transaction.

alternatives

Policy LoanUnless otherwise stated in the policy, the policyholder has the right to borrow against the accumulated cash value of the life insurance policy. By borrowing, the policyholder can get money from the policy without having to surrender it. the policy may even offer a better interest rate than what banks offer. however, this is not a typical loan because it never actually has to be repaid. any outstanding loan balance will be subtracted from the death benefit or future surrender value. Interest on life insurance policy loans is not tax deductible for individuals, although it may be tax deductible for businesses in some cases.

Cash Value WithdrawalAnother option is to take a withdrawal from the cash value portion of the life insurance policy. this is also known as a partial surrender. Unlike a loan, a withdrawal will permanently reduce the death benefit, but there are no interest payments as there are with policy loans. however, there will be a tax on any withdrawal in excess of the base cost of the policy.

See also : Under 26? Youve got health insurance options

viatical settlementIn a viatical settlement contract, a person with a terminal or chronic illness agrees to sell their life insurance policy to a viatical settlement provider. In exchange for all of her rights and obligations under the life insurance policy, the person receives a lump sum cash payment that is a percentage of the face value of the policy (usually 40 to 85 percent). these incomes are not normally subject to income tax. viatical settlements apply only to people with terminal or chronic illnesses, and specific requirements must be met.

Life SettlementLike a viatical settlement, a life settlement is the sale of a life insurance policy to a third party (for example, a life settlement company). the difference, however, is that life settlements are generally for those who do not have a chronic or terminal illness. Sales proceeds in excess of basis (generally, premiums paid less withdrawals, reduced by the amount attributable to pure insurance coverage) are taxable. Generally, gain equal to the difference between the policy basis and the cash surrender value is treated as ordinary income for tax purposes, while any remaining proceeds from the sale in excess of the cash surrender value are taxed as long-term capital gains. however, it is important to consult a qualified tax professional for more details.

let the policy lapseif the policyholder stops paying the premium, the accumulated cash value in the policy will be used to pay the premiums and the policy will eventually lapse (after the stated grace period expires), unless the cash value is large enough to generate enough dividends or interest to support the policy. Depending on the type of cash value policy held, failure to pay premiums may cause the death benefit to be reduced, leaving the policyholder with a “reduced payment” policy. Or, the life insurance company may give the policyholder an extended term policy for a designated number of years, months, and days that does not require future premium payments. in the event of policy expiration, the accumulated cash value will be forfeited. however, no income tax will be incurred and no surrender charges will be due.

tax considerations

When a person waives a policy, any gains will generally be taxed as ordinary income. Gain can be calculated by subtracting the policy basis from the cash value, which includes terminal dividends and unearned premiums. base represents the policy premiums that the policyholder has already paid (reduced by any amount withdrawn).

When there is a policy loan, the loan amount is subtracted from the cash value before calculating dividends, unearned premiums and surrender charges, but must be added back to the cash value to calculate the total gain. the formula looks like this:

gain = cash value (includes terminal dividends and unearned premiums – surrender charges) + policy loan – basis

When replacing or exchanging one cash value life insurance policy for another, any taxable gains resulting from the surrender of the original policy may be deferred.

If you have questions, contact the insurance experts at henssler financial: [email protected] or 770-429-9166.

disclosures
The following information is reproduced with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is intended to provide valuable information about particular investments, not a purchase recommendation. The investments referenced in this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. the contents are intended for general information purposes only. the information provided should not be the sole basis for making decisions and is not intended to replace the advice of a qualified professional, such as a tax advisor, insurance advisor or attorney. Although this material is designed to provide accurate and authoritative information on its subject matter, it may not apply in all situations. Readers are urged to consult with their advisor regarding specific situations and questions. this should not be construed as an offer to buy or sell any financial instrument. It is not our intention to state, indicate or imply in any way that current or past results are indicative of future performance or expectations. As with all investments, there are inherent risks associated with them. carefully obtain and review all financial material before investing. henssler is not licensed to offer or sell insurance products, and this general description should not be construed as an offer to purchase any insurance products.

Source: https://amajon.asia
Category: Other

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button