Can You Cancel Universal Life Insurance in Torrance?

What happens when you surrender the policy

Most people say cancel. The insurance company calls it a full surrender. You fill out the company's surrender form, sign it, and send it in. Some companies also want a copy of your ID or a notarized signature on larger amounts.

Once it is processed, the coverage stops. Your beneficiary is no longer protected by that policy. The company sends you a check for the cash surrender value, and a tax form follows if any of it counts as income.

If you just stop paying premiums, that is a different path. A universal life policy keeps pulling monthly costs from the cash value until it runs dry. Then the policy lapses, often with nothing left to pay out. Stopping payments quietly can cost you more than a clean surrender.

How much money you actually get back

The number on your statement called cash value is usually not the number you walk away with. Look for the line marked surrender value or cash surrender value. That is closer to the real check.

Three things cut into it. Surrender charges are fees the company keeps if you leave in the early years, and they shrink over time until they disappear. Policy loans you took out, plus the interest on them, come off the top. And if the cash value has been drained by rising insurance costs, there may be little left at all.

• Ask the insurer for an in-force illustration and a current surrender quote.
• Check the year your surrender charges end. Waiting a few months can sometimes save a real amount.
• Add up every premium you have paid. You will need that total for the tax question.
• Write down any outstanding loan balance and the interest rate on it.

Will you owe taxes if you cancel

Maybe. The money you paid in premiums is your basis. If your surrender check is larger than that total, the extra is generally taxed as ordinary income. If the check is smaller than what you paid in, there is usually no tax, but you also cannot deduct the loss.

Loans make this trickier. If you borrowed against the policy and the loan gets paid off from the cash value at surrender, that payoff can count as money you received. People have been surprised by a tax bill on a surrender that paid them very little in cash. A tax professional should look at your numbers before you sign anything.

Options to look at before you cancel

Canceling makes sense for some people. The kids are grown, the mortgage is paid, and the premium no longer fits the budget. But a surrender is final, and you are older now than when you bought the policy. New coverage will cost more, and a health change since then could make it hard to get at all.

Our angle on any policy is the same: compare what it costs to keep, what it costs to leave, and what it would cost to replace. Sometimes keeping a smaller policy is the better deal over the long run. Sometimes moving to term life insurance for the years you still need coverage is cheaper and simpler. Here are the common middle roads.

• Lower the death benefit. A smaller policy costs less each month and may stay in force for years on the cash value already built.
• Change your premium. Universal life lets you pay more or less within limits, as long as the cash value can carry the monthly costs.
• Take a partial withdrawal or a loan for a short-term need instead of closing the whole policy.
• Do a 1035 exchange. This moves the cash value into another life policy or an annuity without triggering tax on the gain at that time.
• Ask about selling the policy. Some older policyholders can sell to a third party for more than the surrender value.

Do this before you mail the surrender form

If you still need any coverage, get the new policy approved and in force first. Do not leave a gap where your family has nothing. Then surrender the old one.

Read your most recent annual statement and the illustration side by side. If the projections show the policy lapsing in a few years even with your current payments, that changes the math. Our office in Torrance can go through those pages with you in person, or by phone or video, and lay out each choice in plain numbers.