Tax Consequences of Surrendering Your Life Insurance Policy

Life insurance can be a helpful investment, but some may feel like they no longer need it and want to get some of the money they paid into the policy back. Fortunately, permanent life insurance policies pay out a cash surrender value, allowing you to recoup some of your payments if you no longer need coverage. However, it’s helpful to know that getting the cash surrender value may cause you to owe taxes in certain situations. This article will explain how the cash surrender value of life insurance works and cover the tax implications of surrendering your life insurance policy with cash value.

How the cash surrender value of life insurance works

The cash surrender value of a life insurance plan is the amount you’ll receive if you surrender your policy to your insurer. This amount is based on your cash value, the component of a permanent life insurance policy that can help you build cash value through regular premium payments. A policy’s cash surrender value depends on the policy’s duration, growth, and assets. Surrendering your policy earlier in the term may result in a lower cash surrender value since the cash value will be smaller, and you may owe surrender charges. 1 However, if you surrender the policy later, you could receive a larger payout since the cash value will be larger, and you’ll pay fewer fees.

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Is the cash surrender value of life insurance taxable?

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. 2 Several other scenarios may result in potential tax consequences when you surrender your policy, which we’ll discuss below.

When the cash surrender value of life insurance may be taxable

How to receive the cash surrender value of your life insurance policy

If you’d like to surrender your policy and receive the cash surrender value, here’s how to do so:

Should I surrender my life insurance policy?

Here are some factors to consider before surrendering your life insurance policy:

Alternatives to getting the cash surrender value of your life insurance policy

You don’t have to surrender your life insurance policy to access your cash value. Some additional ways to use your cash value while maintaining your coverage include: 4

Borrow from your cash value

You can borrow against your permanent life plan’s cash value at low interest rates and favorable terms. Policy loans have no due date. However, keep in mind that interest accumulates on your outstanding loan balance. Your policy can lapse if the loan balance grows larger than your remaining cash value.

Withdraw from your cash value

Withdrawing from your cash value lets you tap into your wealth without a loan and without surrendering your policy. However, withdrawals may trigger tax consequences if you withdraw investment gains. Furthermore, withdrawals may reduce your death benefit.

Use your cash value to pay premiums

Many permanent life insurance policies let you pay premiums with cash value once you accumulate enough. This can help you cut your life insurance costs while maintaining full coverage. However, if you drain your cash value, your policy can lapse.

Learn more about life insurance

Surrendering your life insurance policy lets you receive a significant payout, but you must give up your coverage and potentially owe taxes. Plus, surrender charges could eat into your funds if you surrender too early.

Instead, you might choose to borrow against or withdraw from your cash value, or even use it to pay premiums if your policy allows it. That way, you can keep your coverage and tap into your hard-earned cash value. If you’re ready to help protect your loved ones or start planning for your future, speak with an Aflac agent about your life insurance options.

Still have questions?

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1 Investopedia – What is Cash Surrender Value? How It Compares to Cash Value. Updated May 23, 2022. https://www.investopedia.com/terms/c/cashsurrendervalue.asp. Accessed June 1, 2023.

2 Policygenius – What is the Cash Surrender Value of Life Insurance? Updated May 1, 2023. https://www.policygenius.com/life-insurance/cash-surrender-value/. Accessed June 1, 2023.

3 Forbes – Is Life Insurance Taxable? Updated January 4, 2023. https://www.forbes.com/advisor/life-insurance/is-life-insurance-taxable/. Accessed June 1, 2023.

Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.

Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.

68000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400.65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series: Whole: In Arkansas, Delaware & Oregon, Policy Q60100M. In Idaho Policy Q60100MID. In Oklahoma, Policy Q60100MOK. In Texas, Policy Q60100MTX.Q60000 series: Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C.

Final Expense insurance coverage is underwritten by Tier One Insurance Company. The life insurance policy described herein contains an optional Accelerated Death Benefits Rider that is intended for favorable tax treatment under Section 101(g) of the Internal Revenue Code. Aflac does not give legal or tax advice. Please consult with a qualified legal, tax, and accounting advisor before engaging in any transaction. In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).

This is a brief product overview only. Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations and exclusions. For complete details, including availability and costs, please contact your local Aflac agent.

Aflac does not offer Universal or Variable Universal life insurance.

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