What is the difference between lapse and surrender of life insurance policy?
Asked by: Duncan Gleason | Last update: August 13, 2025Score: 4.8/5 (5 votes)
What is the difference between a life insurance lapse and a surrender?
While a lapse results in the loss of coverage and potential loss of premiums paid, a surrender provides a cash value payout in exchange for terminating the policy.
Do you lose money when you surrender a life insurance policy?
The insurance company will pay you the cash surrender value, if there is any available. Generally, this is the cash value of the policy to date, less any loans, loan interest, premiums outstanding, or surrender fees. Your life insurance coverage ends, and some or all the money you receive may be subject to tax.
What happens when you let a life insurance policy lapse?
If there isn't enough cash value in the policy to pay the premium, or once the cash value has been used up due to continued non-payment, your policy will slip into the grace period. Your policy will officially lapse once the grace period ends, meaning your coverage will end and no death benefit will be paid.
Do you get money back when you surrender a life insurance policy?
Your insurer will terminate the coverage and send you a check for the policy's cash surrender value. Cash surrender value is the money a life insurance policyholder receives for ending their coverage before the policy's maturity date or before they pass away, minus any surrender fees and taxes on earnings.
What Is Life Insurance Cash Surrender Value?
How much money will I get if I surrender my policy after 3 years?
Types of Surrender Value
This means the premium must be paid for a minimum period of 3 years. If you surrender after 3 years, the surrender value will be around 30% of the premiums paid.
Is it better to surrender or sell a life insurance policy?
Selling a whole life insurance policy in a life settlement is a strategy to get far greater returns than a surrender. On average,every $100,000 in life insurance policy value will only gain back $460 in surrender value. This means even a $1 million whole life policy will be surrendered for around $4,600 in cash.
Can I get money from lapsed life insurance policy?
When a life insurance policy lapses, the death benefit associated with the policy is terminated. This means that in the event of the policyholder's death, the beneficiaries will not receive any payout. Additionally, the accumulated cash value in certain policy types may also be forfeited.
Can you get insurance back after lapse?
If your coverage lapsed because of a missed payment, you may be able to get your coverage reinstated if you pay your bill and your insurer had a grace period. If you have a lapse because your current carrier dropped your coverage or didn't renew your policy, you can get a quote from another insurer.
Can you reinstate a surrendered life insurance policy?
Reinstatement — The restoring of a lapsed or surrendered policy to full force and effect. The company requires evidence of insurability and payment of all amounts necessary, including interest, to put the policy into the condition it would have been in had the lapse or surrender not occurred.
Do I pay taxes if I surrender my life insurance policy?
The total of premiums you have paid into the policy is known as the cash basis. When you surrender the policy, the amount of the cash basis is considered a tax-free return of principal. Only the amount you receive over the cash basis will be taxed as regular income, at your top tax rate.
Why do people surrender their life insurance policy?
- The reason you originally bought the policy no longer exists.
- You can't afford to pay the premiums anymore.
- You need cash, and this is your only source of available funds.
When should you cash out your life insurance policy?
It's often recommended to wait at least 10 to 15 years before cashing out a whole life insurance policy, allowing the cash value to grow. Before making a decision, consult with your insurance agent or a financial advisor to understand the full impact of cashing out.
Can you get money back from a lapsed whole life insurance policy?
Some insurance policies include a nonforfeiture clause, which means that if you stop paying premiums, you still receive some sort of benefit. You can think of this as a lapsed policy refund. If your coverage lapses, the insurance company will refund part of your premium payments and/or pay you the policy's cash value.
How long does a lapse in insurance last?
An insurance lapse will stay on your record for between six months and three years, depending on your state. This means that you will pay a higher insurance premium on your car until the lapse is no longer on your driving record.
Can a lapsed policy be surrendered?
So, if you discontinue the lapsed policy and surrender it, you will get the surrender value, as per the terms & conditions of the policy and the coverage will be terminated. It is not possible to revive a surrendered policy, but you can revive a paid-up policy within the revival period.
How long can life insurance lapse?
Your grace period — the amount of time you have to make a payment after the due date and bring your life insurance policy back to good standing — is usually 30 days, but it depends on your policy and insurance provider.
Does "lapsed" mean cancelled?
Lapse of coverage is distinctly different than cancellation of an insurance policy in that lapse generally does not require notice to you, the insured, whereas cancellation generally does.
How long does a policy lapse?
A policy does not lapse each and every time a premium payment is missed. Insurers are legally bound to give a grace period to policyholders before the policy falls into a lapse. The grace period is usually 30 days. Insurers provide policyholders a period of 30 days to pay for the missed premium deadline.
What is the difference between life insurance lapse and surrender?
Surrender. A life insurance lapse occurs when you unintentionally fail to pay premiums, leading to an automatic termination of the policy. On the other hand, a surrender happens when you intentionally end your policy before its term, usually in exchange for the cash value it has accrued.
What can I do with a lapsed insurance policy?
Here are some steps you should take to address a lapse: Step 1: Contact your auto insurance provider. Ask what happened, when it lapsed, and what they'd suggest for getting it reinstated. See if you might possibly have to pay a late fee, a reinstatement fee, or higher premiums because of the lapse.
What is the penalty for cashing out a life insurance policy?
Some policies will have a surrender fee in the case of cashing out an entire policy, while others may charge fees for partial surrenders. Other than that, there are no additional penalties or fees. The surrender fee is usually 10% to 20% but it can be as high as 35% to 40%. Check your policy contract.
How much money will I get if I surrender my policy?
If surrendered in the second year, 30% of the total premiums paid will be returned. If surrendered in the third year, 35% of the total premiums paid will be given. If surrendered anytime from the fourth to the seventh year, 50% of the total premiums paid will be returned.
What is the cash value of a $10,000 life insurance policy?
Say, for example, that you purchase an insurance policy with a face value of $10,000. Once the policy matures, the cash value of the policy should equal $10,000.
Which is better paid up or surrender?
However, surrendering a policy early results in reduced payouts, as bonuses and other benefits may not fully accrue. Opt for paid-up value if you want to retain insurance coverage without additional premium payments. This choice is beneficial when long-term protection is a priority, even if the payout is reduced.