Surrendering a Whole Life Insurance Policy

[cdttmm]

Okay, Mustachians, I'm ready and willing to take the face punches associated with this one so here you go:

I've got a whole life insurance policy with a total cash value of ~$41,000 (and a total death benefit of ~$225,000). I want to surrender the policy, take the cash, and invest it. I don't need the policy. I have no dependents. My SO and I are FI with the option to RE (even if we were to go our separate ways), but we both prefer the SWAMI life. I see no need to keep the policy intact.

Any tips for surrendering the policy? I know I'll be taxed on the gains, which I'm assuming means the amount I've earned in dividends since the policy went into effect (~$35,000). The policy has been in place for 15 years. Any benefit to waiting until January 1, 2017 to surrender the policy? My income will likely be lower in 2017 than 2016.

[sparkytheop]

If it makes a difference on taxes, and you don't have to pay any premiums between now and 2017, I'd just wait until January.

When you request the surrender form, you'll have to deal with a lot of "but...!", offers to change things up, a lot of "what if...?" stuff.  Just stay firm with "I've considered all my options and I know what I want.  Please just send the surrender form." 

Also make sure you have taxes withheld so you don't get hit with any kind of fee for underpaid taxes (they'll probably withhold 10%).

I dealt with this over the summer, although my gains were small, so no real affect on my taxes.  I was in a completely different situation when I got the insurance, but now there was just no need for it at all.

[cdttmm]

Thanks, sparkytheop, for the feedback.

The $2300 premium is due December 27th, so that alone seems like a good reason to cancel sooner rather than later.

I bought the insurance policy back when our situation was different so it made sense then (although if I'd thought it through, it probably would've made more sense to get term insurance...), but now there's no point to having it. I did buy it from a "friend" so I'll definitely get resistance, but this "friend" has turned out to really just have their own interests at heart, so I'll have no problem seeing this through.

[ysette9]

Around the time we turned 30 we decided to be responsible adults and buy life insurance policies. We called up USAA for advice and did whatever they told us to do. A number of years later I realized through reading on this forum that the whole life policies we had were silly. I called up to cancel mine and had to patiently field all of the questions about my life situation to explain why I did not need the policy. You shouldn't have to provide any answers, but it made it faster and easier to show it was unnecessary. In my case it went something like: "We have term policies in place should one of us die before our child is independent, we save half of our income, we have no mortgage or other liabilities, we don't need the investment portion of the policy because we have investment." Good luck; I hope you don't get too much grief for canceling.

[newton]

Thanks for posting.  I have been considering the same.  I have a $50K policy that has about $10K of cash value.  I didn't realize I had to pay taxes on the amount :) 

I appreciate the question and will be following for my own benefit. 

[LeRainDrop]

I've been mulling over cashing in a whole life policy that my grandma had purchased when I was a kid, as the premium due date comes around in December.  I didn't even think about getting taxed on gains, so many thanks for the reminder -- it won't affect my decision whether to cash in, but it's at least good to be aware up front.

[sparkytheop]

The cash value of mine was about $20k, but only had to pay taxes on about $2k of that. The money would have made a lot more in my retirement account, but I didn't have one when we got it. Oh, well, better late than never on getting the cash back and putting it to work.