Note: if your policy doesn't have cash value, but you're thinking of lapsing or cancelling the policy, scroll down to the section on life settlements below. Your policy may be worth cash in the secondary market regardless of the type of policy or whether it has cash value.

Some permanent life insurance policies will develop cash surrender values over an extended period of time. If you have this type of policy there are two general ways you can access this cash value. The first and most common way is to surrender the policy (thus the reason this money is called the 'cash surrender value'). The second way is to take a loan against the cash value of the policy.

If you surrender the policy a portion of the surrender value may be taxable. In addition,you've surrendered the policy - cancelled it. You no longer have any life insurance.

If a policy loan is taken, the policy can continue in force. However premiums must continue to be paid on the policy. As it is a loan, any loan amount plus interest would be deducted from the death benefit. Your life insurance paid to your beneficiaries is reduced by the amount of the loan plus interest in order to pay the loan back.

Cash values can grow substantially over time. In most cases however the total cash value will be a small percentage of the death benefit. In recent years a secondary market for life insurance has sprung up. This market is called 'Life Settlements'.

Life settlements, while having a non-descriptive name, are relatively simple to understand. Rather than cancelling your life insurance policy it is sold to an investment company that specializes in this area.

From your viewpoint, the policy will be effectively cancelled (even though it will be kept in force by the investment company). You will no longer have any rights to the policy and will not receive any future death benefits. In addition, you will not pay any future premiums on the policy. Instead, the investment firm will maintain the policy and pay the premiums.

In exchange, the investment firm will pay you for the policy. In most cases this payment will be substantially higher than the cash surrender value of the policy. In fact, most life settlements are in the range of 30%-80% of the death benefit of the policy.

So, you sell all the rights to your life insurance policy and in exchange are paid a substantial percentage of the death benefit. This money is yours to do with as you see fit. In exchange for paying this amount, the life settlements investment company will recieve all rights to the policy. They will maintain the policy for your lifetime, the insurance company will pay them the death benefit upon your death.

Nor do you have to be critically ill to sell you policy. Certainly younger individuals in poor health may be potential candidates, but if you're over 65 and in fair health you may still find companies interested in purchasing your unwanted life insurance policy.

In short, if you are considering surrending or cancelling your insurance policy to get the cash surrender value you may be substantially better off to consider a life settlement.

Interested? Would you like a quote on your life insurance policy?
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