If you’re thinking about surrendering your life insurance policy for the cash value, it’s important to know all the facts. There are times when you may desire the cash value of your policy instead of the coverage, such as when you no longer need the coverage it provides. Surrendering your life insurance policy means exchanging the policy for its accumulated cash value. Here’s what you need to know to do this.

The longer you keep your cash value life insurance policy current, the more surrender value it gains. The decision to cancel your policy will result in a payment to you of your surrender value. How is the value determined? Your insurance company will look at the current cash value of your policy and add to that the accumulated dividends and unearned premium. Next, any outstanding loans and interest, along with surrender charges, are removed. What’s left is your surrender value.

When you decide to cancel your policy you may do so in whole or part. Some policies allow you to divide the policy up, surrendering a portion while maintaining the rest. If you decide to surrender only a portion of the policy your death benefits and cash values will be reduced. You’ll have a number of options if you decide to go this route. For instance, you may withdraw to basis. The basis is the amount of premiums you’ve paid on your policy in total, minus dividends that have been paid. Surrendering to basis is common because it’s not taxable.

When you surrender your policy, expect to pay surrender fees, which vary based on the age of the policy. Usually, policies will have a surrender schedule attached in which the charges decrease as the policy ages. Also be aware that anything you gain from your policy is subject to income taxes.

Always weigh the decision to surrender your life insurance policy carefully. Decide if there are any reasons why you may still need life insurance, because if you decide to get a new policy you’ll probably pay much more than you were. Also, make sure you protect yourself financially in the event you need cash later for an emergency.