Comparing Whole Life Policy Surrender Options: Cash vs. Reduced Paid-Up

If a policyholder can no longer pay premiums on a Whole Life policy, they have two primary non-forfeiture choices involving the Cash Surrender Value (CSV). The decision rests on whether the policyholder needs immediate cash or desires to maintain permanent coverage.

Option 1: Cash Surrender (Liquidation)

• Action: The policy is immediately terminated, and the insurer pays the policy owner the CSV (Cash Value minus Surrender Charges).
• Outcome: Immediate cash is received, but all insurance protection is lost, and the policy gain may be subject to income tax.

Option 2: Reduced Paid-Up (RPU) (Continuation)

• Action: The CSV is used as a single premium to buy a new, smaller, fully paid-up Whole Life policy.
• Outcome: No more premiums are required, permanent protection (albeit a reduced death benefit) is maintained, and the small cash value continues to grow tax-deferred.

The RPU option is usually the better choice unless immediate liquidity is absolutely necessary.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. RPU is a permanent decision; understand the exact reduced death benefit before electing this option.