Cashing Out Life Insurance: What You Need To Know

Life insurance can be cashed out in several ways, but the options available to you depend on the type of policy you have. Term life insurance, for example, is a type of policy that cannot be cashed out because it does not have a cash value component. Permanent life insurance, on the other hand, does have a cash value component and can be cashed out in full or partially.

Withdrawing your entire cash value

Surrendering your life insurance policy will allow you to withdraw its entire cash value. This will, however, end your coverage, meaning that your beneficiaries will no longer be owed a death benefit when you pass away. You may also have to pay a surrender charge or income taxes if your payout is higher than the premiums you paid.

Before you decide to cash out your life insurance policy, it is important to consider your overall financial plan and whether you have enough assets to leave behind for your dependents if you die. Surrendering a policy is usually a last resort, and you should consult a financial advisor to understand all the potential consequences of accessing your cash value.

If you are having trouble paying your premiums, there are other options to consider. For example, you could reduce the policy's face value to lower your premium, or use the cash value to convert the policy to a paid-up status to keep some amount of coverage in place. You could also borrow from your cash value to pay your premiums, but be cautious not to deplete your cash value so much that your policy lapses.

Making a partial withdrawal

A partial withdrawal from a life insurance policy is also known as a partial surrender. This is when a policy owner withdraws some of the cash from the cash value portion of their permanent life insurance policy while keeping the policy in force. This means that the policy owner can remove some of the cash value without having to cancel the entire policy.

The two types of policies that allow partial surrenders are universal life insurance and whole life insurance. However, they approach partial surrenders differently. Universal life insurance allows the policy owner to withdraw any cash surrender value at any time, whereas whole life insurance has specific rules about partial surrenders. Whole life policy owners can only withdraw cash value created either through the elective paid-up additions rider or dividends used to purchase paid-up additions. They cannot withdraw cash value accumulated through the guaranteed accumulation of base whole life cash value.

A partial surrender of a life insurance policy can be useful if the policy owner feels less concerned about their total amount of the death benefit and wishes to use the cash value the policy has accumulated, or if a serious situation arises that requires the policy owner to find money to cover an obligation.

It is important to note that a partial surrender will lower the cash value of the policy, and if the insured dies while there is still an unpaid cash value balance, the amount of that unpaid balance will be charged against the death benefit paid out to the policy's beneficiary. There may also be additional costs when taking a partial surrender, such as processing and administrative fees.

Borrowing from your policy

Borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it. However, there are a few things to keep in mind. Firstly, you can only borrow against a permanent life insurance policy, such as a whole life insurance or universal life insurance policy. These policies are more expensive than term life insurance but have no predetermined expiration date and allow you to build up a cash value.

When borrowing from your life insurance policy, you are essentially borrowing from yourself, as the cash value of your policy acts as collateral for the loan. There is no credit check or approval process involved, and the repayment terms are flexible. The interest rates on policy loans are typically much lower than those for personal loans or credit cards, ranging from 5% to 8%. Additionally, policy loans do not affect your credit score.

However, it is important to note that policy loans reduce the death benefit if not paid off. The loan amount and any interest owed will be deducted from the death benefit that your beneficiaries receive. Also, if you do not make interest payments, your policy could lapse, and you may owe taxes on the amount you borrowed. Therefore, it is crucial to pay back the loan in a timely manner and keep up with your premium payments.

The amount you can borrow against your life insurance policy depends on factors such as the cash value of your policy, how long you have had the policy, and the terms and conditions set by your insurer. Most insurers allow you to borrow up to 90% of the policy's cash value.

Before borrowing from your life insurance policy, it is recommended that you fully understand the terms of your policy and the potential risks involved. Consult with your insurance agent, financial advisor, or estate planning attorney to make an informed decision.

Surrendering your policy

Surrendering your life insurance policy means telling your insurance company that you no longer want life insurance coverage. In exchange, you receive a portion of the cash value of the policy, known as the cash surrender value. This amount will generally be slightly less than the total amount of cash value in the policy because of surrender charges assessed by the policy.

If you surrender the policy during the early years of ownership, when the value is relatively low, the company will likely charge surrender fees, reducing your cash value. These charges vary depending on how long you've had the policy and, often, on the amount being surrendered. Some policies can levy surrender charges for many years after the policy is issued.

In addition, when you surrender your policy for cash, the gain on the policy is subject to income tax. Additional taxes could be incurred if you have an outstanding loan balance against the policy.

Although surrendering the policy can get you the cash you need, you're giving up the right to the death-benefit protection afforded by the insurance. If you want to replace the lost death benefit later, getting the same coverage might be more complicated or more expensive.

• The coverage is no longer needed. For example, if your policy's beneficiary passes away before you, you may have no other person to name as their replacement.
• To get the cash value. When a policy is surrendered, the policy owner will receive all of the remaining cash value in the policy.
• Less expensive coverage is available. If your health has improved since you took out your policy, it may be worth surrendering your current policy and taking out new coverage.

Alternatives to surrendering your policy

There are several ways to access the cash value in your life insurance policy that don't require you to surrender it. These include:

• Direct withdrawal: You take money out of your cash value but leave enough in the policy to keep it in force. You will have to continue paying premiums, but you can keep the death benefit protection this way. The death benefit is reduced by the amount you withdraw.
• Taking out a loan using the policy as collateral. The interest on the loan is usually less than you would pay to other traditional lenders, and there are no underwriting requirements for this type of loan.
• Life settlement: The most profitable way to cancel your coverage. A qualified buyer purchases your policy and assumes responsibility for paying the premiums. The buyer will then receive the death benefit when you die, and you will walk away with a lump sum upfront.

Selling your policy

Selling your life insurance policy is a way to cash out and involves selling your policy to a third party for a lump sum that is greater than the cash value. This transaction is often called a life settlement. The third party will then take over the premium payments and receive the death benefit when you die.

You can sell your life insurance policy through a transaction known as a life settlement or a viatical settlement. However, you should consider your financial situation and alternatives before selling. You may find it's better to reduce coverage or borrow against the cash value instead. If your only other options are surrendering the policy or letting it lapse, selling it will be a better choice.

According to LISA's 2023 Annual Market Data Collection Survey, selling a policy resulted in an average payout that was 622% higher than the cash surrender value. The amount you receive will be more than the cash surrender value, but less than the death benefit of the policy.

To sell your life insurance policy, you'll need to complete an application and submit medical and insurance records. A broker can gather these documents on your behalf. After submitting the documentation, your partner will begin the underwriting process, which involves evaluating your information to verify its accuracy and check if you qualify for a life settlement.

To qualify for a life settlement, you'll typically need to be at least 70 years old, have a death benefit of at least $100,000, and have a policy type that's whole, convertible term, variable, or universal life. If you meet the requirements, the underwriters will then appraise the value of your policy, which is based on your policy's value, your insurance premiums, and your health status.

Once you've received and accepted an offer, the buyer will send you closing documentation to complete. After you sign the documents, your life insurance company will be notified, and they'll transfer ownership of the policy to the buyer. During the transfer, you'll receive a one-time payment for the agreed amount, minus applicable taxes and fees.

The profit you receive from a life settlement is taxable, and you'll have to pay taxes if you received more from the settlement than you've paid in premiums over the policy's life. The taxation rules for life settlements can be complex, so it's recommended to consult a financial advisor.

There are also fees associated with life settlements, and as much as 30% of your proceeds could be paid in commissions and fees, reducing the net amount you receive. Additionally, there may be restrictions to qualify for a life settlement. For example, you may need to be at least 65 years old or have a certain level of health impairments.

Reasons to sell your life insurance policy

Most reasons for selling a life insurance policy come down to no longer needing coverage, being unable to afford the policy, or wanting to cash out. Here are some common reasons:

• You can no longer afford the policy premiums
• Living expenses have increased, and you have less income or savings
• You need money to pay for a large, surprise expense
• You want to create a rainy-day fund for medical bills and long-term care costs
• Your children are grown and financially independent
• Your policy term is about to end
• You sold your home and no longer need to worry about estate taxes

Alternatives to selling your life insurance policy

• Make your policy more affordable by reducing the death benefit, removing extra riders, or bundling your life insurance with other forms of insurance.
• Replace your life insurance policy with a cheaper one or one that offers different benefits better suited to your current needs.
• Pay for premiums with cash value: Use the cash value in your policy to subsidize or pay for premiums.
• Borrow against your policy: Borrow money from the cash value of your policy if you want to maintain your policy but need money for other expenses.
• Utilize an accelerated death benefit: This rider, included in most insurance policies, lets the policyholder receive a portion of their death benefit in advance if needed.

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