When am I allowed to keep the cash value of my insurance policy?

You can keep the cash value of your permanent life insurance policy if you decide to surrender the policy, either because you don't need it anymore or because you cannot afford to pay the premiums. This is one of the three non-forfeiture options, along with reduced paid-up insurance and extended term insurance.

Although the cash value surrender option is generally not recommended, it is appropriate for people who do not need life insurance anymore but can make use of some extra cash, such as retired people whose children have taken their lives in their own hands.

Characteristics of the Cash Value Surrender Option

• Once the policy is surrendered for its cash value, the policy is terminated and all benefits under it cease.
• It is not advisable to surrender a policy for its cash value in the early years of the policy as cash values in the first years are typically very small. Cash values usually do not start accumulating until the end of the second year.
• Insurers have the right to delay the cash value payment for up to six months but they do not usually resort to this measure.
• If a policyholder drops a permanent policy and keeps the cash value, they will owe income tax on the difference between the funds received (including any loans) and the amount paid towards the policy.

Alternatives to the Cash Value Non-Forfeiture Option

• One way to escape from paying income tax is if you take a policy loan instead. In this case, however, you are keeping the policy and have to continue paying premiums. Furthermore, you owe interest rate on the amount taken out.
• If the reason for you surrendering your policy is that the premiums are too high, you can always switch to term insurance. You can receive term insurance for a certain period of time for the full death benefit.
• The cash-surrender value can be used to purchase prepaid permanent insurance for life for a reduced death benefit.

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