Retirement Planning: Surrender
Owners of cash value life insurance policies can terminate said policies at any time and take the cash value in actual cash dollars. This act is called surrender.
Surrender charges
Because of commissions and other costs, an insurance company may lose money on a life insurance policy during the first few years of its force. In the event that a cash value life insurance policy is surrendered before the insurer recovers its costs, the insurer will levy surrender charges on the policy to make up the difference.
The policy's cash value, less surrender charges, is called its surrender value or cash surrender value. When surrendering a policy, the policyholder really only walks away with the surrender value of the policy.
Taxes
Although the interest on your cash value accumulated tax-free, you might face income taxes or capital gains taxes upon surrender of the policy: if your cash surrender value exceeds your cost basis (the sum of premiums you paid into the policy), the difference between the two is taxable. All the cash value you access up to your cost basis is tax-free.
surrender value – cost basis = taxable income
If your cash surrender value results in taxable income, you might do postpone policy surrender until retirement. Conceivably, then, you would be taxed in the lowest tax bracket possible.
Other access to cash value
A policyholder needn't utterly terminate his life insurance policy in order to make use of its cash value. Universal life insurance policies permit withdrawals, which are partial surrenders, enabling policyholders to take any amount of the policy's cash value. Besides that, all cash value life insurance policies allow owners to take loans from their cash value, on better terms than they could typically get from lenders.
