Life Insurance Surrender: Benefits and Procedures
As a policyholder of a life insurance policy, you can make withdrawals from your savings at any time. This is known as a surrender. However, these surrenders are subject to certain specific rules that are important to understand, particularly with regard to taxation. In this guide, you’ll find everything you need to know about life insurance surrenders so you can manage your savings in the best possible way.
What is a life insurance surrender?
In life insurance terminology, a surrender refers to the withdrawal of all or part of the savings invested in the policy and its various investment vehicles. The policyholder may surrender the policy at any time. Similarly, you are free to withdraw any amount you wish from the various investment vehicles. However, you will not receive the funds immediately; it may take anywhere from several days to several weeks.
It should be noted that there are two main types of surrender: partial surrender of a life insurance policy and total surrender of a life insurance policy.
Life Insurance: What Are the Differences Between a Partial Surrender and a Full Surrender?
Depending on the nature of your goal, you have two options.
Partial Contract Buyout
A partial life insurance surrender simply involves making a withdrawal from your savings. After several years of growing your savings, you can, for example, use a portion of the gains to cover a specific financial need, such as buying a car or funding a big trip. Some policyholders—usually retirees—even schedule regular (monthly or quarterly) partial redemptions of a fixed amount, as a form of supplemental income.
Full Contract Buyout
A full surrender of a life insurance policy means the termination of your policy. In other words, you receive your entire savings back, without the option to reinvest any portion of that amount in your previous investment vehicles. If necessary, you will need to purchase a new life insurance policy or another savings product that aligns with your investment goals.
The Special Case of the Advance Payment
Making a partial withdrawal has one major drawback: it negatively impacts your return and the interest earned due to a reduction in the capital invested across your various investment products. To prevent your savings from being eroded too much, you can opt for an advance. In practice, this takes the form of an interest-bearing loan granted by the insurer.
This option has the advantage of not affecting either the tax treatment or the profitability of your life insurance policy. However, it does involve additional costs due to the interest owed.
What tax rules apply to policy surrenders under a life insurance policy?
If you decide to take out a life insurance policy, you should be aware that both partial and full surrenders are subject to taxation. Since September 27, 2017, all gains realized on payments made after that date are subject to the single flat-rate withholding tax (PFU). This tax consists of:
- social security contributions (17.2 percent);
- a non-final flat-rate withholding tax (7.5% or 12.8%, depending on the amount of the premiums and the age of the policy).
To find out which tax rate applies to you, simply refer to the table below:
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In other words, the most favorable tax treatment applies to redemptions made after at least eight years, for premiums totaling less than €150,000.
Steps to Follow When Surrendering Your Life Insurance Policy
In practice, the steps involved in requesting a life insurance surrender are fairly simple. To do so, all you need to do is:
- Contact your insurer or the policy provider by mail or through your online customer portal;
- Enter the amount you wish to withdraw, as well as the various investment vehicles you wish to “divest” from and the amounts for each;
- wait for approval from the insurer or distributor, who will verify that your application meets the requirements (identity, account number, bank account information, etc.);
- receive the funds in the bank account provided within approximately one week.
Life Insurance Surrender: Pros and Cons
Surrendering a life insurance policy comes with its share of advantages and disadvantages.
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