Cashing In On Mutual Savings: Life Insurance Options

There are several ways to cash in your mutual savings life insurance policy, but it's important to understand the pros and cons of each option before making a decision. The four main ways to access the cash value of your life insurance policy are: borrowing, withdrawing, surrendering, or selling. Each option has its own set of advantages and disadvantages, and it's essential to carefully consider the potential impact on your death benefit and any applicable taxes or fees. It's also worth noting that term life insurance policies do not have a cash value component, so only permanent life insurance policies are applicable in this case.

Cancelling your policy

If you want to cancel your life insurance policy, you can surrender it. This means you'll receive the cash value of the policy, minus any surrender fees. Surrendering the policy will end the policy, and your beneficiaries won't receive a death benefit when you die.

There are a few things to keep in mind when surrendering your policy:

• Fees: You may have to pay surrender fees, which will reduce the cash you receive.
• Taxes: You may have to pay taxes on any gains made on the cash value of the policy.
• Loss of coverage: Surrendering your policy means you will no longer have life insurance coverage.
• Impact on beneficiaries: Your beneficiaries will not receive a death benefit from the policy when you die.

Before surrendering your policy, consider your overall financial plan and whether you have enough assets to leave behind for your dependents if you die. You should also review the surrender process and any associated fees with your insurance provider, as they can vary depending on the policy and how long you've had it.

In addition to surrendering your policy, you may have other options to access cash from your life insurance policy, such as withdrawing or borrowing against the cash value. These options can provide you with cash while keeping your policy active, but they may also have their own pros and cons that you should consider.

Withdrawing from your policy

There are typically no restrictions on what you can spend the withdrawn money on. Additionally, you won't owe income tax on withdrawals up to the amount of the premiums you've paid into the policy. However, if you withdraw more than this amount, you may have to pay taxes on the distribution above your cost basis. Withdrawing cash from a life insurance policy is a serious decision and should not be taken lightly.

Another option to access cash from your policy is to take a loan against the cash value. Many policies allow you to borrow against the cash value, and this can be easier than getting a loan elsewhere as there is no credit check and a flexible timetable for repayment. However, you will generally be expected to repay the loan with interest, and if you die before paying it back, the amount you owe will be deducted from the death benefit. Additionally, the insurance company will continue to pay dividends and interest on the borrowed cash value, but this amount is usually lower than for non-borrowed funds.

If you are considering withdrawing from your policy, it is important to weigh the pros and cons carefully. While you can access the cash for whatever reason you need, it could increase your tax burden, incur loan interest charges, and leave your family with less money than intended if you don't pay it back before your death. Therefore, it is crucial to request an "in-force illustration" from your life insurance company to understand how your planned withdrawal will affect your policy's financial performance.

Borrowing from your policy

The pros of borrowing from your policy include:

• No loan application or credit check is required.
• You can repay the loan on your own schedule.
• The money goes back into your policy instead of to a lender.
• You may be able to earn a positive arbitrage on the money you borrow.

However, there are also some cons to this approach:

• You will have to pay interest on the money you borrow.
• If you do not repay the loan, the loan amount and interest will be deducted from the death benefit that is paid to your beneficiaries.
• If you borrow too much, your policy could lapse.

When you borrow from your cash value, you must be careful not to borrow too much and cause the policy to lapse. The benefit of a policy loan is that you can continue to earn interest on the outstanding loan amount. For example, if the interest rate on the loan is 5% and the return on your cash value is 7%, you would still earn 2% on the amount you've borrowed. On the other hand, if the rate of return dropped to 0% in a down market, you would have to pay the full 5% interest rate on the loan.

The process for borrowing from your policy is simple. Contact your insurance company to let them know how much you want to withdraw, and they will wire the cash to you or deposit it into your bank account.

Surrendering your policy

When you surrender your life insurance policy, you are essentially cancelling it and terminating your coverage. By doing so, you will receive a lump sum payment known as the "surrender value". This is the cash value of your policy minus any applicable surrender fees or charges. These fees can be substantial, sometimes ranging from 10% to 35% of the cash value, and they typically decrease over time. It is important to review the terms of your specific policy to understand the potential fees involved.

Another important consideration is the tax implications of surrendering your policy. If your payout exceeds the amount of premiums you have paid, you will likely owe income tax on the gain. Additionally, if there is any positive appreciation in your policy, where the cash value has grown beyond the premiums paid, you may also be subject to a tax bill.

Furthermore, surrendering your policy means that your beneficiaries will no longer receive a death benefit when you pass away. This is a significant consequence to weigh against your need for immediate cash. Before surrendering your policy, consider if there are alternative options available, such as borrowing from your policy or using the cash value to pay premiums and keep the policy active.

Overall, surrendering your life insurance policy can provide you with immediate cash, but it comes at the cost of losing your coverage and potentially incurring fees and tax liabilities. It is recommended to consult with a financial advisor or tax professional to fully understand the implications of surrendering your life insurance policy.

Selling your policy

Selling your life insurance policy is another way to get cash from your insurance. This involves selling your policy to a third party for a lump sum that is greater than the cash value. The transaction is often called a life settlement. Although you’ll continue making premium payments on the policy, if you die, the death benefit will go to the third party.

You could consider a life settlement if you have an immediate need for cash that trumps the need for life insurance. You must be a certain age, typically 65, or have a certain level of health impairments to qualify for a life settlement. The older you are, the better your chances of selling your policy. Being highly qualified by age and health condition will also help you get a bigger payment. Work with reputable life settlement companies, and get offers from more than one company.

Be aware that there can be fees associated with life settlements, and you’ll pay income taxes on the amount you receive from the sale of the policy.

Pros and cons of selling your policy

Pros: You’ll get more cash than you would by surrendering your policy.

Cons: There are restrictions to qualify for a life settlement. The cash offer will be much less than the death benefit of the policy. Your heirs won’t receive a death benefit from the policy. You may owe taxes on the sale. Proceeds from the sale may disqualify you from certain programs such as Medicaid. It may be difficult to sell a policy if you’re younger than 65 and it’s for less than $100,000.

Frequently asked questions