What are Surrender Rights?
How life insurance surrender works
When you buy a permanent life insurance policy, the assumption is that you’ll hold that policy for the rest of your life. But if things change — say you become unable to afford the premiums or decide you no longer want life insurance coverage — you can choose to surrender the policy.
That means that you’ll give up your coverage, making the insurance contract and any attached riders null and void. That releases you from the obligation to pay premiums, but it also means that your beneficiaries won’t receive anything from the life insurance provider when you pass away.
If you surrender a life insurance policy with a cash value component, your surrender rights require the insurer to distribute the policy’s accumulated cash value to you — minus relevant deductions.
Those deductions vary depending on your policy terms, how long you’ve held the policy, and other factors. You may be charged a surrender fee, for example, especially if you’ve had the policy for a decade or less. Or if you took out a loan against the policy’s cash value, your insurer will subtract the outstanding loan amount from your cash value.
The cash value minus deductions like these is called your policy’s surrender value. Per your surrender rights, your insurer must pay the surrender value to you when you give up your life insurance policy.
Tax implications of surrender rights
Your surrender value may come with tax ramifications. If the surrender value is less than or equal to what you’ve paid into the policy in premiums so far, the IRS considers it a return of premium.
If, however, the rate of return on your cash value account has outpaced your premium payments, you may need to pay taxes on the overage amount. Any money that you get in surrender value that exceeds your premium payments to date can be subject to income taxes.
In other words, your surrender rights entitle you to your policy’s cash value if you cancel your policy, but they come with implications. Make sure you understand the associated surrender fees and taxes before choosing to exercise your surrender rights.