How To Withdraw Money From Your Life Insurance Policy

Life insurance can be a vital component of a comprehensive financial plan, providing financial protection to your loved ones after your death. But did you know that some types of life insurance policies also have cash accounts you can tap into while you're alive?

There are two major types of life insurance: term and permanent. Term life insurance only provides a death benefit to your beneficiaries after you're gone and only pays out if you pass away within a certain number of years. It doesn't have a cash value component. Permanent life insurance, on the other hand, has both a cash value and a death benefit. This cash value grows over time as you pay your premiums, and if your balance is large enough, you can withdraw money from your policy or borrow funds from the insurer, using your policy as collateral.

However, it's important to note that withdrawing money leaves less for your heirs after your death, and there may be tax implications and other costs associated with accessing the cash value of your policy early.

Borrowing from your life insurance policy

When you borrow from your life insurance policy, your insurer lends you the money and uses the cash in your policy as collateral. This means that the policy's cash value can continue to accumulate, but it's important to check with your insurance company how interest and any dividends will be determined and paid when you have an active loan. Policy loans do not affect your credit score and there is no approval process or credit check. Additionally, the loan is not recognised by the IRS as income and remains tax-free as long as the policy stays active.

While borrowing from your life insurance policy can be convenient, there are a few potential drawbacks to consider. Firstly, policy loans reduce the death benefit if not paid off. Secondly, life insurance companies add interest to the loan balance, which, if unpaid, can cause the policy to lapse. Therefore, it is important to make interest payments and stay on top of your regular premium payments to avoid these issues.

Before deciding to borrow from your life insurance policy, it is crucial to weigh the pros and cons and consider the potential impact on your financial future.

Withdrawing from your life insurance policy

Permanent life insurance, on the other hand, has both a cash value and a death benefit. The cash value of a permanent life insurance policy grows over time as you pay your premiums. If your balance is large enough, you can withdraw money from your policy or borrow funds from the insurer, using your policy as collateral.

• Withdrawing money will leave less for your heirs after your death.
• Withdrawals above the cost basis may result in taxable ordinary income.
• Policy loans and withdrawals will reduce the policy's death benefit and cash values.
• There may be surrender fees or early withdrawal penalties if you cancel your policy or make a withdrawal within the first few years.
• Interest rates on policy loans are typically lower than on other types of loans, but the interest will reduce the cash value of your policy.
• If you do not repay the loan before your death, the loan amount and interest will be deducted from the death benefit paid to your beneficiaries.

Overall, withdrawing from your life insurance policy can be a good option if you need cash for an emergency, but it is important to consider the pros and cons before making a decision.

Surrendering your life insurance policy

When to surrender your life insurance policy

You might choose to surrender your life insurance policy if you've found a better deal, you can no longer afford the premiums, or you simply no longer need life insurance coverage. For example, if no one depends on you financially, you may not need life insurance, and it may not make financial sense to keep your policy.

Another reason to surrender your policy is if you need a large amount of cash quickly. Surrendering your policy can give you access to a lump sum of cash, although there may be other ways to access your cash value without giving up your coverage, such as a policy loan.

How to surrender your life insurance policy

Most life insurance companies make it straightforward to surrender your policy. The process usually involves contacting your insurance company or agent, filling out some paperwork, and then waiting for your payout. However, before you surrender your policy, it's important to consider the potential tax implications and any surrender fees you may have to pay.

The cash surrender value of a life insurance policy is the amount you'll receive if you surrender your policy. This amount is based on the policy's cash value, which is the component of a permanent life insurance policy that allows you to build cash value through regular premium payments. The cash surrender value is usually less than the cash value of the policy because the insurer typically charges a surrender fee.

Tax implications of surrendering your life insurance policy

Selling your life insurance policy

The process of selling a life insurance policy begins with finding an interested buyer, meeting the basic qualifications, and then discussing your options with a licensed provider. Here are the steps you can take to sell your life insurance policy:

• Find an experienced life settlement provider: Research the life settlement industry to find a potential buyer. By selling your policy to a licensed life settlement provider, you will be working with experienced professionals who have a deep understanding of the specifics of life settlements.
• Meet the qualifying factors: Check that you meet the minimum qualifying factors, such as owning a policy with a death benefit of $100,000 or more, and being over the age of 60. A decline in health from the time your policy was issued can also help improve your chances of qualifying.
• Take a detailed health questionnaire: If you meet the basic qualifying factors, you will need to complete a detailed health questionnaire that provides an in-depth look at your health.
• Provide authorization to the provider: The insured and the policy owner will need to authorize the life settlement provider to access medical records and contact the insurance company on the policy owner's behalf.
• Share your policy details with the life settlement provider: Provide a copy of your policy contract and a premium illustration to give the provider more insight into the specifics of your policy.
• Wait for the underwriting process to be completed: This is the process where the life settlement company evaluates all the specifics of your policy and medical records to determine the value of your policy.
• Review the offer: Once the life settlement provider has all the necessary information and would like to proceed with making an offer, they will present the specifics of the offer and explain the next steps. You can accept the full cash offer or opt for an alternative, such as a Retained Death Benefit, where you receive a smaller cash payment while also keeping a portion of your policy's benefits with no future premium obligations.
• Complete the closing process: The closing process involves the transfer of ownership of the policy and all the accompanying documentation. During closing, your settlement payment will be placed in escrow until the insurance company has verified the change of ownership. Once verified, your settlement payment will be released.

It's important to note that the amount of cash offered for your policy can vary greatly based on the specifics of your case. There is no standard settlement ratio or payout amount, so it's challenging to provide an accurate estimate of your policy's worth until you go through the evaluation process. However, selling your life insurance policy can provide a great opportunity to access cash from an unwanted policy, especially if you are nearing retirement or facing unexpected expenses.

Using the cash value to pay your premium

Using the cash value of your life insurance policy to pay your premium is a way to keep your coverage in place if you're facing financial hardship. This option can help you reduce your monthly expenses while maintaining your policy. However, it's important to note that using the cash value to pay premiums may not be possible if all funds have been utilised. Additionally, doing so could result in the lapse of your policy.

When you use the cash value to pay premiums, it's essentially like using your own savings to cover the cost. This option is typically available when your cash value reaches a certain level, and it can be a helpful way to manage your expenses, especially during retirement when you need to reduce your outgoings.

It's important to understand that any amount withdrawn from the cash value and not repaid before your death will lead to a reduction in the death benefit paid to your beneficiary. This means that if you use the cash value to pay premiums, your beneficiary will receive a lower payout when you pass away.

Before choosing this option, it's recommended to consult your insurance provider to understand the specific rules and requirements for your policy. Additionally, consider seeking advice from a financial advisor to ensure you're making an informed decision that aligns with your financial goals and needs.

Frequently asked questions