Unlocking Cash From Your Life Insurance Policy

Life insurance is often taken out to provide a financial safety net for loved ones after the policyholder's death. However, permanent life insurance policies, such as whole life insurance, universal life insurance, variable life insurance, and indexed universal life insurance, can also be cashed out while the policyholder is still alive. This is because permanent life insurance policies have a cash value component that grows over time. Term life insurance policies, on the other hand, do not have this feature and cannot be cashed out.

There are several ways to get cash from a permanent life insurance policy, including withdrawing money, taking out a loan, surrendering the policy, using the cash value to pay premiums, or selling the policy. Each option has its own pros and cons, and it's important to carefully consider the long-term implications of each before making a decision.

Cancelling your life insurance policy

Term Life Insurance Cancellation

Term life insurance provides coverage for a specified period, such as 10, 20 or 30 years. It’s a popular choice for those seeking affordable coverage with straightforward benefits. If you decide to cancel your term life insurance, the process is usually pretty simple.

One of the most effective ways to cancel is by stopping your premium payments. Simply stop sending in the cheques. If you have automatic payments set up, you may need to call the insurance company to end these transfers. Many policyholders set up automatic payments through ACH (automated clearing house) transfers or electronic fund transfers (EFT).

It’s a good idea to call your insurance carrier directly to confirm the cancellation and ensure there are no further obligations on your part. Most insurers have forms or online options to finalize the cancellation process, making it quick and convenient.

By handling it this way, you ensure the policy is properly cancelled and avoid any potential lapses in communication that could leave the policy active with premiums still owed.

Permanent Life Insurance Cancellation

When it comes to cancelling a permanent life insurance policy, the process can be more complex than with a term policy due to the additional elements involved.

Permanent life insurance policies, such as whole life or universal life, are designed to provide lifelong coverage, with maximum coverage ages ranging from 95 to 121, and typically include a cash value component. Because of this, cancelling — or “surrendering” — these policies can involve more than just stopping payments.

When you surrender a permanent life insurance policy, you may receive a payout from the cash value, but this is often reduced by surrender charges, especially if you haven’t held the policy for many years. In the early years of the policy, surrender fees can significantly reduce or even eliminate the cash value you receive. Over time, these fees decrease, but it’s important to understand that the cash value might not be as substantial as expected if you surrender the policy prematurely.

If you have any outstanding policy loans, your surrender value will also be reduced by the balance (any unpaid loan plus accrued interest). Additionally, if you made any withdrawals, this permanently reduced the available cash surrender value. Cancelling a permanent life insurance policy is a significant decision with potential financial implications, so it’s crucial to fully understand the consequences before proceeding.

Withdrawing from your cash value

Firstly, not all life insurance policies have cash value. Term life insurance, for instance, does not qualify as it is purely an insurance coverage plan with no cash value component. Permanent life insurance policies, such as whole life insurance, universal life insurance, and variable universal life insurance, are the ones that build up cash value over time.

If you have a permanent life insurance policy, you can withdraw from your cash value by simply contacting your insurance company and requesting a withdrawal. The amount you can withdraw depends on the type of policy you own and the company issuing it. Typically, you can withdraw up to the amount you've paid in premiums without incurring tax liabilities. However, if you withdraw more than your basis (the amount paid in premiums), you may owe income tax on the earnings.

It's important to note that withdrawals will reduce your cash value and, consequently, your death benefit. This means that your beneficiaries will receive a lower payout when you pass away. Additionally, withdrawals in the early years of the policy, especially during the first 15 years, may result in higher tax liabilities and could even cause your policy to lapse if you don't adjust your premiums accordingly.

Before making a withdrawal, it is recommended to request an "in-force illustration" from your life insurance company. This will outline how your withdrawal will impact the financial performance of your policy, including the potential reduction in death benefit and any tax implications.

Another option to access your cash value is through a policy loan. Many permanent life insurance policies allow you to borrow against the cash value, often up to 90% of the policy's value. Policy loans do not require a loan application or credit check, and you can repay them on your own schedule. Additionally, you won't owe income tax on the loan as long as you pay it back. However, interest will accrue on the loan balance, and if left unpaid, the outstanding balance, including interest, will be deducted from the death benefit.

In conclusion, while withdrawing from your cash value life insurance policy can provide much-needed funds during financial difficulties, it is important to carefully weigh the pros and cons. Withdrawals and policy loans can reduce your death benefit and may have tax implications. Therefore, it is advisable to consult a financial advisor to understand all the potential consequences before making any decisions.

Borrowing against your life insurance policy

Eligibility

To be eligible for a life insurance loan, your policy must have a sufficient cash value. It usually takes a few years for the cash value to build up to a level where you can borrow against it. The minimum amount required varies by insurer, but it's typically around 90% of the policy's cash value.

Application Process

There is no approval process or credit check required for a life insurance loan. You simply need to request a loan from your life insurance company, and there are no restrictions on how you can spend the money. The loan amount will be based on the cash value of your policy, and you can usually borrow up to 90% of that value.

Interest and Repayment

Life insurance loans typically have lower interest rates compared to personal loans or credit cards. While there is no fixed repayment schedule, it's important to make regular interest payments to avoid accruing excessive interest. Failure to repay the loan can result in a reduced death benefit for your beneficiaries or even cause your policy to lapse.

Pros and Cons

In conclusion, borrowing against your life insurance policy can be a viable option if you need quick access to cash and have a permanent life insurance policy with sufficient cash value. However, it's important to carefully consider the pros and cons before making a decision, as it can have long-term implications for your policy and your beneficiaries.

Using cash value to pay premiums

If you have a permanent life insurance policy, you can use the cash value to pay premiums. This is a good option if you're looking to reduce your monthly expenses but want to keep your policy in place. However, you need to be mindful that any amount taken from your cash value account and not repaid before your death will reduce the death benefit paid to your beneficiary.

Variable and universal life insurance policies are often favoured for this strategy as they allow you to use the policy's cash value to pay premiums. Whole life insurance policies, on the other hand, typically don't let you pay premiums using the policy's cash value, except if you convert to a paid-up policy. Not all insurers offer this option, but with a paid-up life insurance policy, the cash value is large enough that you can stop paying premiums out of pocket.

It's important to closely monitor the cash value to make sure it doesn't drop too far, as this may cause you to lose your coverage. Additionally, this strategy will only work for a short period if you start while the cash value is small or if interest rates are low.

If you're considering using your cash value to pay premiums, consult your insurance agent to find out what rules apply, and request an "in-force illustration" from your life insurance company to see how this move will affect your policy's financial performance.

Selling your life insurance policy

Most types of policies qualify for a life settlement, even term life insurance policies. However, there are some requirements that must be met for a policy to be sold. These include:

• The policy must have a death benefit of $100,000 or more.
• The policyowner is typically over 60 years old.
• There has been a decline in the insured person's health since the policy was issued (although this is not always required).

The process of selling a life insurance policy typically involves the following steps:

• Find an experienced life settlement provider.
• Meet the qualifying factors.
• Take a detailed health questionnaire.
• Provide authorization for the provider to access medical records and contact the insurance company.
• Share policy details with the life settlement provider.
• Wait for the underwriting process to be completed.
• Review the offer and decide whether to accept it or opt for an alternative.
• Complete the closing process, which includes transferring ownership of the policy and placing the settlement payment in escrow until the change of ownership is verified.

It's important to note that there may be tax implications and potential fees or commissions associated with selling your life insurance policy. Additionally, your beneficiaries will no longer receive the death benefit associated with the policy.

Other options for accessing cash from your life insurance policy

If you are considering selling your life insurance policy to access cash, there are a few other options you may want to explore first:

• Surrender the policy: You can cancel your life insurance policy and receive the surrender value, which is the cash value minus any fees. However, this will result in the loss of coverage and your beneficiaries will not receive a death benefit.
• Withdraw cash: You may be able to withdraw part of the cash value of a permanent life policy without canceling the coverage. This will result in a reduced payout for your beneficiaries. Withdrawals up to the amount of the premiums paid are typically tax-free.
• Borrow against the policy: Many policies allow you to borrow against the cash value, which can be a low-cost and flexible way to access cash while keeping your coverage in place. However, if you don't pay back the loan before you die, the amount owed will be deducted from the death benefit.
• Use cash value to pay premiums: If you are struggling to pay your premiums, you may be able to use the cash value of your policy to cover them temporarily.

Frequently asked questions