Cashing Out Whole Life Insurance: What You Need To Know

Whole life insurance is a type of permanent life insurance that provides guaranteed protection for the entirety of your life. It has two components: the face value, or the amount that will be paid to your beneficiaries when you die, and the cash value, which is a savings account funded by a portion of your premiums. When you cash out a whole life insurance policy, you are not getting back your full premium contributions; you will receive the full cash value of the policy. There are several ways to cash out a whole life insurance policy, each with its own pros and cons.

Withdraw your entire cash value

If you have a whole life policy that you have been paying into for a while and you want or need money, you can cash it out entirely. This will get you all the cash value you have built up, but it also means that you will have to surrender your policy. In other words, the coverage you wanted for your loved ones will end.

There are some important considerations to keep in mind when withdrawing your entire cash value. Firstly, you will likely have to pay "surrender charges", which can be significant, especially if you have only had your policy for a few years. These charges vary depending on how long you have had the policy and the amount being surrendered. Secondly, the money you withdraw may be subject to income tax. You won't have to pay taxes if you withdraw up to the amount of the total premiums you paid into the policy. However, if you withdraw any gains or dividends on the policy, these amounts may be taxed as ordinary income. Therefore, it is important to consult with a financial professional or tax advisor before making any withdrawals to understand the potential tax implications.

Additionally, withdrawing your entire cash value can have consequences for your policy. Withdrawals that reduce your cash value could cause a reduction in your death benefit, which is a potential source of funds that your beneficiaries might need. It is important to consider the impact on your beneficiaries before making any withdrawals. Furthermore, withdrawals may also cause your premiums to increase to maintain the same death benefit, or your policy could lapse if insufficient premiums are paid.

Overall, withdrawing your entire cash value from a whole life insurance policy can provide you with immediate cash, but it is important to carefully weigh the benefits against the potential drawbacks, including surrender charges, tax implications, and the impact on your policy and beneficiaries.

Make a partial withdrawal

Making a partial withdrawal from your whole life insurance policy means taking out some of the cash that has accumulated in the policy's cash value portion. This can be a useful way to access cash, but it's important to understand the potential consequences.

Firstly, a partial withdrawal will lower the cash value of your policy. This means that if you pass away before the cash value has been repaid, the amount of the unpaid balance will be deducted from the death benefit paid out to your beneficiary. In other words, your beneficiary will receive less money.

Secondly, there may be additional costs involved when making a partial withdrawal, such as processing and administrative fees charged by the life insurance company. These fees can eat into the amount of cash you receive.

Thirdly, you may or may not have to pay taxes on the funds you withdraw. If you withdraw less than the total amount you have paid in premiums, you will not be taxed on the withdrawal. However, if you withdraw more than this amount, the portion of the withdrawal that exceeds the premium payments may be considered taxable income.

Finally, it's worth noting that a partial withdrawal is just one way to access cash from your whole life insurance policy. Other options include taking out a loan against the policy or surrendering the policy entirely. If you're considering a partial withdrawal, it's a good idea to speak to a financial professional to understand all your options and the potential consequences.

Borrow money from your life insurance

Borrowing money from your life insurance policy can be a quick and easy way to get cash when you need it. However, it is important to note that you can only borrow against a permanent life insurance policy, such as whole life insurance or universal life insurance, which has a cash value component. Term life insurance, which is cheaper and more suitable for many, does not have a cash value and thus, you cannot borrow against it.

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 cash value will continue to accumulate, but it is important to check with your insurance company how interest and any dividends will be determined and paid when you have an active loan. There is no approval process or credit check, and you can use the money for anything you want. The loan is also 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.

Interest is added to the loan balance by life insurance companies, and if unpaid, it can cause the policy to lapse. The amount you can borrow is set by the insurer and is typically no more than 90% of the policy's cash value. It is important to pay the loan back in a timely manner to avoid the risk of your policy lapsing and owing taxes on the amount borrowed. If you pass away with an outstanding loan on your life insurance policy, the loan amount and any interest owed will be taken out of the death benefit, reducing the amount your beneficiaries will receive.

Surrender your policy

Surrendering your policy is a big decision that can have a lasting impact on your financial future. It is also the last resort if you need to cash out your whole life insurance. When you surrender your policy, you are giving up your insurance policy and in return, you receive the cash value less any fees. This can include surrender fees, which can be as high as 10% to 35% of your policy cash value, and taxes on any gains earned on the cash value portion of the policy.

Surrendering your policy also means that your heirs will receive nothing from the policy when you die. Therefore, it is important to ensure that you have adequate life insurance coverage in place elsewhere before surrendering your policy.

To surrender your policy, contact your insurance company to let them know that you want to cancel your policy and receive the cash surrender value. They will then walk you through the process, which may include paying any surrender fees and taxes due on the cash value.

It is important to consider the pros and cons of surrendering your policy before making a decision. On the positive side, surrendering your policy can provide you with a lump sum of cash that you can use for any purpose. It can also relieve you of the burden of paying high premiums. However, the downside is that you will lose your life insurance coverage and your heirs will not receive a death benefit when you pass away.

Overall, surrendering your policy should be a last resort, especially if you do not have adequate life insurance coverage in place elsewhere. It is important to carefully consider your financial situation and goals before making any decisions about your whole life insurance policy.

Sell your policy

Selling your life insurance policy is a transaction known as a life settlement or a viatical settlement. A viatical settlement is only for those with a terminal illness who are expected to live for two years or less.

You can sell your policy through a life settlement broker or directly to a life settlement provider. A broker will gather offers from different providers, but they will take a cut of the final sale price, which could be as much as 30%.

To sell your policy, you will need to provide the details of your policy and your medical records. The buyer will calculate your life expectancy based on these records and make you an offer. If you accept, they will become the new policy owner and will start paying your premiums.

The amount you are offered will depend on your policy's value, your insurance premiums, and your health status. Generally, the older you are and the more health issues you have, the higher the offer. The type of policy you have will also make a difference. Permanent policies with cash value are usually worth more than term policies, which are sometimes ineligible for settlements.

You can expect to receive a payout that is greater than the cash surrender value of your policy but less than the death benefit. According to LISA's 2023 Annual Market Data Collection Survey, the average payout for selling a policy was 622% higher than the cash surrender value.

There are some potential drawbacks to selling your policy. You will likely have to pay taxes on the money you receive, and your beneficiaries will no longer receive a payout when you die. You may also find it difficult to get a new policy in the future, especially if your health deteriorates after selling.

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