Surrender Values of Universal Life Insurance Policies?

Several different types of life insurance exist, each with its own unique set of features and benefits. Permanent policies, like universal life, have the added benefit of accumulating cash value over time. However, without a clear understanding of why and how cash value grows within a policy, accessing, withdrawing or otherwise manipulating that money may endanger the stability of your coverage.

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Universal Life Insurance

Of all the available types of life insurance, universal life is the least expensive and the easiest to understand. These contracts are structured to provide coverage for the rest of your life, while also affording you the ability to adjust your premium payment if and when it became necessary. Cash value accumulates within a universal life contract in direct proportion to the size of your monthly payment. The safety of that equity is guaranteed by the insurance company, as is the minimum interest rate credited to your policy.

Surrender Charges

Because insurance companies spend exorbitant sums of money analyzing and evaluating your application, and subsequently maintaining your account, universal life contracts contain provisions allowing the carrier to keep any and all cash value accumulated should you choose to terminate your policy before the company has had sufficient time to recoup its expenditures. The percentage of cash value kept by the insurance company diminishes over time until eventually disappearing altogether. It is not uncommon for universal life contracts to have surrender charges in excess of 90 to 100 percent.

Surrender Period

The length of time between the day you purchase the policy and the day the carrier will no longer take a surrender charge is called the surrender period. These durations vary from one carrier to the next, and often range from 10 to 15 years. During that time, the size of the surrender charge typically decreases incrementally with every policy anniversary.

Surrender Value

If you choose to cancel your universal life policy before the end of the surrender period, the amount of money you will receive as a refund of premium and accumulated equity is called the surrender value. Unless you owned your policy for a very long time, it is unlikely you will receive a significant portion of your cash value. Your annual policy statement contains information describing your current cash value, the current surrender charge, and the subsequent surrender value. You can also easily obtain these figures by simply calling your broker or the carrier’s customer service department.

References

FINRA: Should You Exchange Your Life Insurance Policy?
Producers Web: Benefits of Owning Permanent Cash Value Life Insurance
All Insurance Info: Universal Life Insurance

Resources (Further Reading)

Bankrate: Life Insurance’s Surrender Value
New York Life: Term or Permanent Life Insurance?

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This article is a Twisted Nonsense Exclusive! (04/04/2011)