Yes, closing (surrendering) a whole life insurance policy often triggers penalties, primarily in the form of surrender charges and potential tax liabilities. These fees are typically highest in the first 10 to 15 years of the policy, meaning you may receive significantly less than the total cash value built up.
Cancel / surrender the policy
In this situation, you'll request to surrender your policy, and you'll receive the cash value minus any fees and surrender penalties. You may have tax implications, such as if the cash value exceeds the premiums paid. On the bright side, you won't have to pay the premiums anymore.
There is typically no penalty for cashing out whole life insurance because these policies are designed to offer the opportunity to help build wealth. However, surrendering the policy may result in surrender charges if done before a specified date.
Insurers typically reduce the surrender fee once a year over the first decade the policy is active, meaning if your surrender penalty is equal to 10% of your annual premium in year one, it might be 9% in year two, down to 1% in year 10, and 0% after that. Surrender fees are listed in your policy contract.
Permanent life insurance policies usually build up a cash value. This means you get a cash value back if you cancel your policy. The amount would be less than what you paid in premiums for the insurance costs. You may be able to take out a policy loan or use your life insurance policy as collateral for a loan.
Whole life insurance
As you make payments, your cash value should grow. If you want to access your full cash value and cancel your policy, you will receive your cash surrender value.
A life insurance policy's cash surrender value can be taxable. Any amount you receive over the policy's basis, or the amount you paid in premiums, can be taxed as income.
The value of your life insurance refers to the death benefit paid to beneficiaries. To find the cash value of your life insurance, calculate your total payments and subtract surrender fees. Remember, the value for a sale will be lower than the death benefit to allow the buyer to profit.
Surrendering your life insurance policy is one way you can liquidate, but selling a policy you don't need may be a better strategy. Selling has several advantages to surrendering it, including higher proceeds and greater flexibility. Surrendering the policy is faster but selling it usually brings you more money.
Whole life insurance disadvantages include high premiums compared to term life, slow cash value growth in early years (due to fees and commissions), and limited flexibility, making it hard to change coverage or stop payments without penalties, plus a long-term commitment that might not suit changing financial needs. Its complexity and the opportunity cost (money could grow faster elsewhere) are also significant drawbacks for many people, notes Thrivent and Millennium Brokers.
There isn't any age cut-off that makes life insurance no longer worth it; it's all about your personal situation. That being said, it is often worth having life insurance after 65 if you have dependents who rely on you financially.
The "life insurance 7 year rule," or 7-Pay Test, is an IRS test for permanent life insurance (like Whole or Universal Life) to prevent overfunding; if you pay more than the maximum premium needed to fully fund the policy in seven years, it becomes a Modified Endowment Contract (MEC). MECs lose some tax benefits, making withdrawals and loans taxable as income (earnings first) and potentially subject to penalties, though they still provide a tax-free death benefit. The test resets if you make significant changes (like increasing the death benefit) to the policy, starting a new seven-year period.
One consideration may be the cash value portion of your policy, rather than surrendering the full coverage. The bottom line is you should consider your circumstances and alternatives before surrendering your whole life insurance policy, and surrendering your policy may come with fees or taxes.
It's often recommended to wait at least 10 to 15 years before cashing out a whole life insurance policy, allowing the cash value to grow. Before making a decision, consult with your insurance agent or a financial advisor to understand the full impact of cashing out.
How long does it take to build cash value in life insurance? Cash value typically doesn't accrue for the first two to five years of a policy's term. It can take decades for it to accumulate into a significant amount.
Whole life insurance policies also offer the ability to access the available cash value in a tax-advantaged manner via partial surrenders or policy loans without triggering an immediate tax liability. This makes these policies an appealing option to consider when supplementing a retirement income strategy.
Surrender the policy
This means functionally canceling your policy. If you do this, your life insurance coverage will end. You'll generally receive most or all of the cash value that has accumulated in your life insurance policy, but it may be subject to surrender fees and federal income taxes.
Cash surrender value is the actual amount of money you will receive if you choose to terminate a permanent life insurance policy before its maturity date, or before you die.
Whole life insurance disadvantages include high premiums compared to term life, slow cash value growth in early years (due to fees and commissions), and limited flexibility, making it hard to change coverage or stop payments without penalties, plus a long-term commitment that might not suit changing financial needs. Its complexity and the opportunity cost (money could grow faster elsewhere) are also significant drawbacks for many people, notes Thrivent and Millennium Brokers.
Quick Answer. In addition to providing a death benefit, cash value life insurance builds up cash value you can draw from now. But unless you withdraw, borrow or otherwise use the cash value, it typically goes to the insurance company—not your beneficiaries—after your death.
Various companies decide their own surrender value factor, but usually it is the percentage of premiums paid over the course of your insurance term. For example, if you stop paying premiums in/ from the fourth year, and we can assume that your policy's surrender value factor is 30%.