Who Can Cash A Life Insurance Check?

Life insurance is a crucial financial safety net for loved ones and dependents. While it serves as an important source of financial protection, life insurance policies can also be cashed out or borrowed against to meet immediate financial needs. Understanding the terms of your policy, the type of payout, and the associated fees and taxes is essential before making any decisions. This article will explore the options available to beneficiaries and policyholders, including withdrawing, borrowing, surrendering, or selling a policy, and provide guidance on how to make an informed choice.

Cashing out a life insurance policy

Understanding Your Policy

Firstly, it's crucial to know what type of life insurance policy you have. There are two main types: term life insurance and permanent life insurance. Term life insurance is designed to cover you for a specified period, such as 10, 15, or 20 years, and then ends. Permanent life insurance, on the other hand, is designed to cover you for your entire life and includes policies such as whole life and universal life.

Cash Value Considerations

The next step is to determine if your life insurance policy has a cash value. Not all life insurance policies build cash value. Term life insurance policies, for example, typically don't accumulate cash value, so you can't cash them out. Permanent life insurance policies, such as whole life and universal life, can build cash value over time. This cash value can be accessed through withdrawals, loans, or surrendering the policy.

Withdrawal Options

If your policy has accumulated cash value, you have a few options for withdrawing the funds. You can make a full withdrawal, which means surrendering your policy and receiving the entire cash value minus any surrender charges. This option will result in the cancellation of your coverage. Alternatively, you can choose a partial withdrawal, where you take out a portion of the cash value while keeping your policy active. However, this will result in a smaller death benefit for your loved ones. It's important to note that withdrawals may be taxable, depending on the amount withdrawn and the specific rules of your policy.

Borrowing Against Your Policy

Another option is to borrow money from your life insurance policy. This allows you to access the cash value of your policy while keeping it active. You won't have to qualify for the loan financially, and the interest rates are typically lower than other types of loans. However, any unpaid balance, including interest, will reduce the death benefit that your beneficiaries will receive. Additionally, if the loan balance and interest accrue to match the total cash value of the policy, the policy may lapse.

Surrendering Your Policy

If you decide to cancel your policy entirely, you can surrender it and receive the full cash value, minus any surrender fees. However, this option comes with several downsides. You will have to pay taxes on any gains earned on the cash value, and your beneficiaries will not receive a death benefit. Additionally, there may be surrender charges that reduce the cash value you receive.

Selling Your Policy

Another option for accessing cash from your life insurance policy is to sell it to a third party through a life settlement. This option typically requires you to be at least 65 years old or have a certain level of health impairments. By selling your policy, you will receive a lump sum that is greater than the cash value but less than the death benefit. The buyer will then take over the premium payments, and when you pass away, they will receive the death benefit. Keep in mind that there may be fees and income taxes associated with life settlements.

Weighing the Pros and Cons

Before making any decisions, it's crucial to consider the financial implications for both you and your beneficiaries. Cashing out a life insurance policy can provide much-needed funds, but it may also result in reduced death benefits, tax liabilities, and higher costs for your loved ones. It's important to read the fine print, understand the tax and fee structures, and consult with a financial professional before making any decisions.

Withdrawing cash from a life insurance policy

Types of Policies

Not all life insurance policies allow you to withdraw cash. It depends on the type of policy you have. Term life insurance, for example, does not qualify. Term life insurance is the most affordable type of life insurance, but it only offers coverage for a limited time and does not build cash value. On the other hand, permanent life insurance policies, such as whole life or universal life insurance, often cost more but allow you to access the cash value.

Building Cash Value

Even if you have a permanent life insurance policy, it takes time to build cash value. You will need to pay premiums for several years before there is enough cash value to withdraw. The cash value of your policy may be much less than the total premiums you have paid or the amount of insurance you have purchased. It can take years for the cash value to grow undisturbed and reach the death benefit amount.

Withdrawing Cash

If your policy has built up cash value, you can withdraw it when you want. Contact your insurance company and let them know the amount you wish to withdraw, and they will send you the funds. However, withdrawing cash will reduce the death benefit, so your beneficiaries will receive less when you pass away. Withdrawals are typically taken from your "basis," which is the amount you have paid into the cash value through premiums. These withdrawals are usually not taxable since they are considered a return of your basis. However, if you withdraw more than your basis, you may have to pay taxes on the gains.

Partial Withdrawal

You can also choose to make a partial withdrawal, which means withdrawing part of the cash value while keeping the policy active. This option allows you to access some cash while still providing a death benefit for your loved ones, although it will be a reduced amount.

Borrowing Against the Policy

Another option is to borrow money against the cash value of your policy. Many policies allow you to take out a loan using the cash value as collateral. Borrowing against your life insurance may be easier than getting a traditional loan, as there is usually no credit check or loan application required. You can repay the loan with interest, or the amount can be deducted from the death benefit if you pass away before repaying it in full. Keep in mind that any unpaid balance will reduce the benefits your beneficiaries will receive.

Surrendering the Policy

If you decide you no longer need the life insurance coverage, you can surrender the policy entirely and receive the "surrender value," which is the cash value minus any fees. However, this option should be carefully considered, as it means cancelling your coverage and giving up the death benefit for your beneficiaries. There may also be surrender charges or penalties for cashing out early, and you may owe income tax on any gains above the amount of premiums paid.

Weighing the Pros and Cons

Withdrawing or borrowing cash from your life insurance policy can provide much-needed funds, especially during financial emergencies. However, it is important to understand the potential downsides. In addition to reducing the death benefit and possible tax implications, withdrawing or borrowing cash can impact the performance of your policy over time. It is recommended to request an "in-force illustration" from your insurance company to understand how your planned withdrawal or loan will affect the policy's financial performance. Additionally, consider exploring alternative options for accessing funds, such as personal loans, home equity loans, or borrowing from a retirement account, before making a decision.

Borrowing from a life insurance policy

When you borrow from your life insurance policy, you are essentially borrowing from yourself, with the cash value of your policy serving as collateral. This means that the policy's cash value can continue to accumulate, but it's important to understand how interest and dividends will be determined and paid. Policy loans do not require a credit check or approval process, and the funds can be used for anything, from bills to vacations or financial emergencies. The interest rates on these loans are typically much lower than those for personal loans or credit cards, and they do not affect your credit score. Additionally, the loan is not recognised by the IRS as income and remains tax-free as long as the policy stays active and is not a modified endowment contract.

However, there are a few potential downsides to borrowing from your life insurance policy. Firstly, policy loans reduce the death benefit if not paid off. If you pass away with an outstanding loan balance, the amount owed, including any interest, will be subtracted from the death benefit, resulting in a lower payout for your beneficiaries. Secondly, life insurance companies add interest to the loan balance, and if left unpaid, this can cause the policy to lapse. Finally, borrowing from your life insurance policy may result in paying more money in the long run. Some permanent policies will guarantee the benefit even if you take out cash, but this may come at a cost, forcing you to pay higher premiums to cover the difference.

Before deciding to borrow from your life insurance policy, it's important to weigh the pros and cons and consider alternative options for accessing funds. It's also crucial to read the fine print and understand the terms and conditions of your policy, including any interest rates, repayment terms, and potential tax implications.

Surrendering a life insurance policy

When you surrender a life insurance policy, you are agreeing to take the cash surrender value that the insurance company has assigned to your policy, and in return, you forgo the death benefit. The 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. This differs from the policy's cash value, which is the total sum in the savings component of permanent policies like whole and universal life insurance. The value differs because of surrender fees, which typically range from 10-35%.

There are several reasons why someone might choose to surrender a life insurance policy, including:

• No longer needing coverage, for example, if children are grown up and independent.
• The policy becoming too expensive.
• Finding a better policy that offers improved coverage or cheaper premiums.
• Needing cash, although it's important to note that there are other ways to get cash from your policy, such as withdrawing or borrowing money from it.

Pros and cons of surrendering a life insurance policy

Pros

• It's a simple and quick process.
• You'll get some money back, which is better than letting the policy lapse by not paying.

Cons

• You'll only get one offer from the insurance company, and it will be a low offer.
• There are surrender fees, which can be up to 35% of the proceeds.
• You'll lose coverage and your beneficiaries will not receive a death benefit.
• It may be difficult or more expensive to replace the lost death benefit later.

Selling a life insurance policy

Selling your life insurance policy can be a good option if you no longer need, want, or can afford it. There are several reasons why you might consider selling your policy, including:

• You can no longer afford the premiums after retirement or job loss.
• Other expenses have increased, leaving you with less disposable income.
• You need cash to cover a large, unexpected expense.
• You need to start saving for long-term care or medical bills.
• Estate taxes are no longer a concern.
• Your children and other dependents are now grown and financially independent.
• Your life insurance policy is nearing the end of its term.

If you're thinking of selling your life insurance policy, it's important to understand the process and the potential implications. Here's a step-by-step guide to selling your life insurance policy:

• Familiarize yourself with life settlement transactions and regulations: Check with your state's insurance authority to learn about the process, licensing requirements, and potential scams.
• Decide whether to use a broker: Using a licensed life settlement broker can provide guidance and assistance during the process, but they will charge a fee for their services. Alternatively, you can choose to handle the process on your own to avoid broker fees.
• Complete the application: You'll need to submit an application to each life insurance settlement company from which you want to solicit offers. As part of the application process, you must grant the settlement company permission to obtain information about your policy and health.
• Provide documentation: The settlement company underwriters will request information about your policy, including its death benefit and premiums, as well as your medical records.
• Wait for the appraisal: The underwriters will review the information and determine the market value of your policy. They will consider the investment potential and the health of the insured.
• Receive and review the offer: If your policy is deemed suitable for purchase, the settlement company will extend an offer. It's recommended to compare offers from multiple companies before making a decision.
• Closing: If you accept the offer, the settlement provider will send a closing package for you to review and sign. Once the documents are returned, your insurance provider will be notified, and you will receive the settlement funds.

The entire process typically takes between 60 and 120 days, depending on how quickly your insurance company and healthcare providers respond to information requests.

It's important to note that selling a life insurance policy requires the cooperation of both the policy owner and the insured person. In most cases, this is the same person, but not always. The policy owner grants access to policy information, while the insured person grants access to medical records.

When selling your life insurance policy, there are a few key considerations to keep in mind:

• You will lose access to the cash value of your policy.
• Your family will not receive the death benefit when you die.
• The money you receive from the sale may be subject to taxes and debt collection.
• The extra income may disqualify you from receiving Medicaid and other financial assistance programs.
• The proceeds from the sale may be accessible by your creditors.

Before making a decision, it's recommended to consult with a financial advisor, estate planning attorney, insurance agent, and accountant to fully understand the legal and financial implications for both you and your heirs.

Frequently asked questions