Unforeseen events may alter your financial circumstances. You may find that you are in a financial bind. Your priorities may be reassessed in this context. Surrendering life policies when finances are stretched takes place for two major reasons:
1) Inability to continue paying premiums and
2) Need for a cash lumpsum immediately
It often happens that people view insurance premiums as a luxury when income is stretched. However, surrendering a life insurance policy should be a last resort. This is because there are many other options with cash-value plans if one cannot afford to continue paying premiums. With a term insurance plan, surrender due to inability to pay premiums is less avoidable. The non-forfeiture options available with cash value plans include:
1) Automatic premium loan: If your policy has a sufficient cash value to cover subsequent premiums, the premium would be automatically deducted as part of a premium loan or withdrawal. This is not such a viable option if the insurer treats this as a loan that must be repaid with interest.
2) Reduced paid-up policy: The cash-value of your policy can be used as a single premium to purchase a reduced amount of permanent life coverage. This would preclude the need to pay additional premiums although the coverage may be greatly reduced, based on the cash value.
If you need to obtain a lumpsum immediately and have few sources of wealth, you can withdraw or borrow from your cash-value policy without necessarily surrendering it. Some companies treat policy loans as interest-free with no requirement of repayment. Those policy loans effectively become withdrawals. More consideration is necessary if the policy loan requires repayment and with interest as well. If you have no option but to surrender the plan, you would receive the net cash-value. The net cash value is the cash value with adjustments made for dividends, paid-up additions, advance premium payments and policy loans.
Surrendering your policy within the first few years of issue would cause you to receive much less than you contributed. Insurers sometimes structure plans so that no surrender or administrative charges are levied after a certain period. The amount of your loss should be considered even if you really are in need of cash. All your non-forfeiture benefits with cash-value plans should be considered before you decide on a complete surrender. It is important to remember that the life insurance plan was acquired to cover a need. If times are difficult and the need for life insurance is still there, the burden on your beneficiaries would be even greater.