In order to discourage policy holders from pursuing life settlements, some insurance companies resort to cash surrender value. Essentially, cash surrender value refers to the amount an insurance company will offer an insurance owner who chooses to give back their life insurance policy. Normally, this occurs when a policy is unwanted or obsolete in the life of a policy holder.
The Cash Surrender policy option is intended for those who would like to abandon their life insurance policy and stop making premium payments.
Besides using the Cash Surrender value of life insurance option, a policy owner has two other options when they do not wish to retain their insurance policy. As a policy owner, you can default on your premium payments (which puts your policy at risk) or you can sell your life insurance to a third party entity (for example, you can sell your policy to a life settlement company).
The Cash Surrender policy option benefits life insurance companies, as well as policy owners.
When an individual returns their policy to the life insurance company, the policy owner gives up claims to the policy's death benefit. This can be advantageous for the insurance company, as the death of the insured would typically require a payout that is much larger that the Cash Surrender Value--and the life insurance company is no longer at risk for the death benefit.
When the policy is returned, the Cash Surrender Value, effectively does not cost the insurance company money, but saves the insurance company money (when compared to an early death benefit claim). The longer the period of time that a policy owner pays an expensive premium, only to return the policy, the greater the gain or profit for the insurance company.
The life insurance company, also, has the opportunity for greater profit when an insured person surrenders a policy and then purchases a new policy.
People who select the Cash Surrender option receive only a small sum of money in proportion to the policy's actual value. Also, it is important to know that insurance companies may impose certain fees, associated with surrendering a life insurance policy. These fees relate closely to the length of time a policy has been retained. Still, people exercise the Cash Surrender option because, although they receive only a small sum of money, this beats the alternative of defaulting on premium payments. When you default, you lose all value accumulated in your life insurance policy.
But better than the Cash Surrender option is the Life Settlement Option. Don't just take our word for it. Check it out for yourself and compare the difference between these two options.
Another article on how to cash in life insurance.