Life Insurance Cash: Withdrawing Money From Your Policy

Life insurance policies can be a vital component of a comprehensive financial plan, providing financial protection to your loved ones after your death. But some types of life insurance policies also have cash accounts that you can tap into while you're alive. Permanent life insurance policies, such as whole life insurance, universal life insurance, variable universal life insurance, and indexed universal life insurance, have both a cash value and a death benefit. This means that the cash value of a permanent life insurance policy 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, to pay for expenses while you're alive. However, withdrawing money will leave less for your heirs after your death and may have tax implications.

Withdrawing money from the cash value portion

Understanding Cash Value Life Insurance

Cash value life insurance policies, such as whole life or universal life, include a cash accumulation account where excess premium payments and earnings are held. These policies offer the opportunity to access this accumulated cash through withdrawals, loans, or partial/full surrenders. It's important to weigh the pros and cons before making a decision, as withdrawing money can reduce your policy's death benefit and may have tax implications.

Step 1: Check Your Policy Details

Not all life insurance policies have cash value. Term life insurance, for example, does not qualify. Permanent life insurance policies, such as whole life, universal life, variable universal life, and indexed universal life, are the ones that typically build cash value over time. Check your policy details or contact your insurance provider to confirm if your policy has a cash value component.

Step 2: Understand the Options and Implications

There are a few different ways to access the cash value in your life insurance policy:

• Withdrawal: You can withdraw a limited amount of cash from the policy, usually up to the amount you've paid in premiums without incurring income taxes. However, withdrawals may reduce your death benefit and could have unexpected consequences, such as increased premiums or a potential lapse in the policy.
• Loan: Most cash-value policies allow you to borrow money from the insurer using your cash-accumulation account as collateral. These loans typically have lower interest rates compared to personal or home equity loans, and there is no loan application or credit check required. However, any outstanding loan balance will reduce your policy's death benefit, and if left unpaid, it could cause a lapse in the policy.
• Surrender: You can cancel your policy and receive the surrender value, which is the cash value minus any applicable fees. However, this option terminates the policy, and your beneficiaries will not receive a death benefit. Additionally, you may owe taxes on the gains earned on the cash value portion.
• Sell: You can sell your policy through a life settlement or viatical settlement, receiving a lump sum that is greater than the cash surrender value but less than the death benefit. The buyer will then take over premium payments, and upon your death, they will receive the death benefit.

Step 3: Contact Your Insurance Provider

Reach out to your insurance provider to understand the specific options, requirements, and costs associated with accessing the cash value of your policy. They can guide you through the process and provide you with an "in-force illustration" to show how your planned actions will affect your policy's financial performance.

Step 4: Weigh the Pros and Cons

Consider the advantages and disadvantages of each option before making a decision. For example, withdrawals may be readily available and tax-free up to a certain limit, but they can reduce your death benefit. Loans may have lower interest rates and more flexible repayment terms, but they will also reduce your death benefit if left unpaid. Surrendering your policy will provide a lump sum, but you will lose your life insurance coverage, and your beneficiaries will not receive a death benefit. Selling your policy can get you a higher cash value, but it also means giving up control of the death benefit and potentially facing additional taxes and fees.

Step 5: Make an Informed Decision

After carefully considering your options and understanding the implications, make a decision that aligns with your financial needs and goals. Remember, the ability to access cash value can be helpful during financial emergencies, but it's important to weigh the short-term benefits against the long-term impacts on your policy and your beneficiaries. If you have any doubts or concerns, consult a financial advisor to get personalized advice.

Surrendering the policy

Surrendering your life insurance policy means cancelling it and receiving a payout from your insurance company. This payout is the cash value of your policy, minus any surrender fees. Surrender fees are usually high in the early years of the policy and then gradually decrease over time. Surrendering your policy is a serious decision that will affect you and your family, so it's important to understand the pros and cons.

Pros of Surrendering Your Policy

• You'll get some money back, which is better than getting nothing if you let your policy lapse.
• It's a simple and quick process.

Cons of Surrendering Your Policy

• You'll only get one offer from your insurance company, and it will be low.
• There are often surrender fees, which can be as high as 35% of the cash value of your policy.
• You'll lose your coverage, and your beneficiaries won't receive a payout when you die.
• You may have to pay taxes on the gain on your policy.

If you're thinking of surrendering your life insurance policy, it's worth considering other options, such as taking out a loan against the policy or selling it.

Borrowing against the policy

Borrowing against your life insurance policy can be a quick and easy way to get cash in hand when you need it. However, there are some specifics to be aware of before going down this route.

Firstly, it's important to note that you can only borrow against a permanent life insurance policy, such as a whole life insurance or universal life insurance policy. Term life insurance, which is generally cheaper and more suitable for many people, does not have a cash value and therefore cannot be borrowed against.

If you have a permanent life insurance policy, you can borrow against the cash value of the policy. Borrowing against your life insurance policy can be easier than getting a loan elsewhere as there is no credit check and a flexible timetable for repayment. There is also no approval process or credit check since you are essentially borrowing from yourself. When taking out a life insurance loan, you are generally expected to repay it, with interest, but there is no mandatory monthly payment. The interest rate on the loan is typically much lower than on a bank loan or credit card, usually falling within the range of 5% to 8%.

It's important to keep in mind that a policy loan reduces your available cash value and death benefit. If you pass away while still owing money on a life insurance loan, the amount you owe, including any interest, will be deducted from the death benefit paid to your beneficiaries. Therefore, it is in your best interest to pay back a life insurance loan as soon as possible. If unpaid, interest is added to the balance and accrues, putting your loan at risk of exceeding the policy's cash value and causing your policy to lapse. If that happens, you will likely owe taxes on the amount you borrowed.

To avoid your policy lapsing, insurance companies generally provide many opportunities to keep the loan current. For example, you can use the cash value of your policy to cover your premiums for a while, keeping your policy safe while you weather a financial storm.

Using the cash value to pay your premium

Using the cash value of your life insurance to pay your premium is a way to keep your policy active during financially challenging times. This option is available to policyholders who have accumulated enough money in their cash value account.

Here's how it works: when you make a premium payment for cash value life insurance, a portion of the money goes into the policy's cash value account. Over time, this account can build up a substantial sum, which you can then use to cover your premium payments if needed. It's important to note that using the cash value to pay premiums will reduce the death benefit that your beneficiaries will receive.

Before deciding to use your cash value to pay premiums, it's essential to understand the potential impact on your policy's performance. You can request an "in-force illustration" from your life insurance company, which will outline how using your cash value to pay premiums will affect the policy's financial performance over time.

Additionally, it's worth noting that permanent life insurance policies, such as whole life and universal life, tend to be more expensive than term life insurance policies because of the cash value element. The higher premiums are due to a portion of each payment being allocated to the cost of insurance and the remainder deposited into the cash value account.

While it can be a helpful option in times of financial strain, using the cash value to pay premiums should be carefully considered, as it will reduce the overall benefits of the policy for your beneficiaries.

Selling the policy

Selling your life insurance policy can be a good option if you need cash, but it's important to understand the process and potential risks involved. Here are some detailed instructions on selling your life insurance policy:

Understanding Life Settlements

A life settlement is the sale of your life insurance policy to a third party, known as a life settlement provider. The owner of the policy receives an immediate payment, and the provider becomes the new owner, paying future premiums and receiving the death benefit when the insured person passes away. It's important to consult a financial advisor, attorney, or accountant before making any decisions, as there may be other options to consider.

Finding a Buyer

You can sell your policy to a life settlement company, such as Coventry or Abacus Life Settlements, which acts on behalf of investors and financial institutions. These companies will pay you a portion of your policy's value, take over premium payments, and receive the death benefit upon your death. It's recommended to gather offers from at least three companies to ensure you get the best deal.

The Application Process

Selling your policy typically involves the following steps: completing an application, providing documentation, undergoing an appraisal, receiving an offer, and closing the deal. You'll need to grant the settlement company access to your policy and medical information. The process can take anywhere from 60 to 120 days, depending on how quickly your insurance company and healthcare providers respond to information requests.

Factors Affecting Your Payout

The amount of money you'll receive depends on several factors, including your policy's premiums, death benefit, your age, and health condition. Most life settlement companies look for policies worth at least $100,000, covering individuals aged 65 or older. If you have a health condition that reduces your life expectancy, you may receive a higher offer.

Tax and Legal Considerations

It's important to be aware of the tax implications of selling your policy. A portion of the settlement may be considered taxable income, and the taxed amount and rates will vary depending on the settlement size, premiums paid, and policy cash value. Consult a tax professional to understand the specific tax consequences. Additionally, the proceeds from the sale may be accessible by your creditors and could affect your eligibility for certain public assistance programs.

When to Sell

Selling your life insurance policy is a complex decision and should be considered carefully. Review alternative options, such as adjusting the death benefit, withdrawing from the cash value, or taking out a loan against the policy. However, if surrendering or letting the policy lapse are your only other choices, selling is likely to result in a better financial outcome.

Frequently asked questions