I cannot tell you what to do with your policy from here. Nobody honest can without seeing it. What I can give you is the order of operations, so you do not make a permanent decision on a bad afternoon.
The trap: money already spent
“I have paid in $40,000. I cannot walk away now.”
That may be the most expensive sentence in personal finance. The $40,000 is spent whether you keep the policy or not. The only live question is whether the next premium is the best use of your next dollar.
There is a clean way to ask it, from The No-Memory Test: if you had no history with this policy, and someone offered it to you today, at today’s premium, for today’s benefits, would you buy it?
Hold on to your answer. Now get the numbers.
Five numbers to request
Call the insurance company and ask for an “in-force illustration.” Then ask for these:
1. The cash surrender value today. What you would actually receive, after any charge for leaving.
2. The total premiums you have paid. This is your cost in the policy.
3. Any loans against the policy. They come out of what you receive.
4. The death benefit. Today, and projected if you keep paying.
5. The “reduced paid-up” amount. A smaller policy you could keep with no more premiums.
Most people have never seen number five. It is often the door they did not know was there.
What surrender costs
Charges. In the early years the cash value is often well below what you have paid in, and some policies also take a fee for leaving. Number one above already reflects both.
Tax. The IRS rule is short. If you surrender a life insurance policy for cash, you include in income any proceeds above the cost of the policy. Your cost is generally the premiums you paid, less things like dividends and unpaid loans. So if you receive less than you paid in, there is usually nothing to tax. If you receive more, the difference is income.
Coverage. Once the policy is gone, it is gone. If someone still depends on you, get the replacement approved and in force before you give this one up. A change in your health since you bought it can make new coverage expensive or impossible.
More choices than keep or cancel
You can keep paying. You can stop paying and take the reduced paid-up policy. With some policies you can let dividends or the cash value carry the premium for a while. You can exchange it for a different policy or an annuity, and there are tax rules for doing that without triggering the gain, so ask the insurer or a CPA about a 1035 exchange before moving anything. Or you can surrender it.
Five choices, not two. People rush to the last one because they are angry about the first.
Be angry at the sale if you like. Decide about the policy with a calculator.
Signs it may be worth keeping
You still need coverage that never expires. Your health has changed. Or the policy is old, the expensive early years are behind you, and what you pay now buys reasonable value for what it does.
Signs it may be time to go
You never needed permanent coverage in the first place. The premium is crowding out retirement savings or debt you could be paying down. Or you are early in the policy and the loss from leaving is one you can absorb.
None of this is advice for your policy. Your five numbers decide it.
One more suggestion. Get a second opinion from someone who earns nothing whichever way you choose. The person who sold the policy has a view. So does the person who wants to sell you the next one.
Related questions: is whole life insurance worth it, why your advisor is pushing life insurance and should I cash out my annuity.
One question for this week: if this policy were offered to you fresh today, would you say yes?
As always, if you want to talk any of this through, the door is open. Genti