Term Life Insurance: Cashing Out And Claiming Your Benefits

Term life insurance is designed to provide financial protection for your loved ones in the event of your sudden passing. It offers a death benefit and typically expires after 10, 20, or 30 years. Unlike permanent life insurance policies, term life insurance does not accumulate cash value over time, and therefore, cannot be cashed out. However, policyholders may have the option to sell their term life insurance policy to a third-party company through a process known as a life insurance settlement. This guide will explore the key differences between term and permanent life insurance, the process of selling a term life insurance policy, and alternative options to consider.

Term life insurance cannot be cashed out

Term life insurance is a type of insurance that is designed to provide a financial safety net for your loved ones in the event of your death. It is a simple and affordable option, but it does not offer any cash benefits before you die. This means that you cannot cash out a term life insurance policy.

Term life insurance differs from whole life insurance and other permanent policies in that it does not have a cash value component. Permanent life insurance policies, such as universal and whole life policies, include a death benefit as well as a cash value account that you can cash out while you are still alive.

With term life insurance, you are solely purchasing a death benefit for your beneficiaries if you pass away before the end of the policy's term. The policy is designed to provide coverage for a specified period, usually 10, 15, or 20 years, and then it expires. Because the number of years it covers is limited, term life insurance is generally more affordable than whole life or permanent policies.

While you cannot cash out a term life insurance policy, you may have the option to sell it to a third-party company. This process is known as a life insurance settlement, and it allows you to receive a portion of the death benefit while the buyer takes over premium payments and receives the full death benefit payout upon your death.

If you are considering alternatives to term life insurance, permanent life insurance policies offer the ability to build cash value over time. This cash value can be accessed in several ways, including withdrawals, loans, or surrendering the policy. However, it is important to carefully weigh the options and consider the potential consequences, such as higher tax liabilities and reduced payouts to beneficiaries.

In summary, term life insurance cannot be cashed out because it does not have a cash value component. It serves the singular purpose of providing a death benefit, making it a straightforward and cost-effective option for those seeking financial protection for their loved ones.

You can sell your term life insurance policy

Selling your term life insurance policy is possible through a process called a life insurance settlement. However, there are a few things to keep in mind. Firstly, you'll likely get less money than the death benefit. Secondly, the buyer will take over the policy, pay the premiums, and receive the death benefit payout. Finally, selling your policy has tax implications and may affect your eligibility for public assistance programs.

• Find a reputable broker: You will need to share information and documents about your policy with a broker, who will assess whether it is feasible to sell.
• Make a sale: The broker will research and match you with a buyer who will take over your policy. The buyer will pay the agreed-upon price and make the premium payments. Once you pass away, the buyer will receive the death benefit payout.

It is important to note that only active policies can be sold, and the value of your policy will depend on factors such as its face value, your age, health condition, premium payments, and remaining term. Consulting a professional experienced in life settlements is recommended to guide you through the process and ensure you get a fair price.

Alternatives to selling your term life insurance policy

If you are hesitant to sell your term life insurance policy, there are a few alternatives to consider:

• Adjust your term life insurance coverage: If your premiums are no longer affordable, you may be able to lower your coverage level and enjoy lower premiums.
• Convert to a permanent life insurance policy: You can convert your term life insurance policy to a permanent policy that builds cash value, such as whole life, universal life, or variable universal life insurance. However, keep in mind that your premium payments will increase.
• Cancel your term life insurance policy: Cancelling your policy will stop the premium payments, but you and your beneficiaries will not receive any benefits.

Whole life insurance can be cashed out

Whole life insurance is a type of permanent life insurance that lasts for the rest of your life, provided you continue to pay your premiums. It is more expensive than term life insurance, but it also has benefits that term life insurance does not.

Whole life insurance includes a death benefit and a cash value account that you can take advantage of while you are still alive. The cash value of a whole life insurance policy can be used to supplement income in retirement, cover college tuition, or make a down payment on a home, for example.

There are four methods for accessing the cash value in a whole life policy:

Surrender

You can cancel your whole life insurance policy and take the surrender value cash payment. However, this option comes with disadvantages. You will no longer have life insurance coverage, and the cash you receive will be lowered by any fees taken out. Surrender fees can be significant, especially for newer policies.

Withdrawal

You can take a cash withdrawal from your whole life insurance policy, and this money is often not subject to income taxes as long as it is not more than the amount you have paid into the policy. However, your death benefit will likely be reduced, and that reduction may be greater than the amount withdrawn, depending on the specific terms of your policy.

Loans

You can typically borrow money through your whole life insurance policy, although the amount varies. The money does not come from your policy but from the insurer, who uses your policy as collateral. Life insurance loans include interest payments, but the rates are typically lower than you would get with personal loans or even a home equity loan. There is no loan application or credit check, and your credit rating does not impact your interest rate. You can choose not to repay the loan, but the outstanding loan balance will typically be deducted from your death benefit.

Use cash value to pay your life insurance premium

You can use the money in your cash value to pay part or all of your policy premiums, making it easier to keep your coverage. This is a popular option for older policyholders who want to use retirement income for living expenses but still want to maintain their life insurance coverage.

Universal life insurance can be cashed out

Universal life insurance is a type of permanent life insurance policy. It differs from other types of permanent life insurance policies, such as whole life insurance, in that the premium and death benefit can be adjusted to meet the policyholder's needs. The policyholder has the flexibility to change the amount of the premium and the death benefit, within certain limits. This makes universal life insurance a good option for those who want the security of a permanent life insurance policy but also want the flexibility to adjust their premiums and death benefit to suit their changing needs.

Universal life insurance policies are designed to provide lifelong coverage, but life can throw unexpected challenges your way. For example, consider a scenario where an individual is diagnosed with a serious illness and suddenly finds the premiums on their universal life insurance policy to be a significant financial burden. In such cases, cashing out life insurance through a life settlement can offer a lifeline, providing a lump sum of money that can be used to cover medical bills, improve quality of life, or simply relieve financial stress.

There are several ways to cash out a universal life insurance policy:

• Surrendering the policy: One option is to cancel the policy entirely and take the surrender value cash payment. However, this option comes with several disadvantages. Firstly, you will no longer have life insurance coverage, and secondly, the cash you receive will be lowered by any fees taken out. Surrender fees can be significant, especially for newer policies.
• Withdrawal: In many situations, you can take a cash withdrawal from your permanent life policy, and that money is often not subject to income taxes as long as it does not exceed the amount you've paid into the policy. However, there is a potential disadvantage: your death benefit will likely be reduced, depending on the value of your cash account.
• Loans: You can typically borrow money through your policy, although the amount varies. The money does not actually come from your policy but from the insurer, who then uses your policy as collateral. Life insurance loans include interest payments, but it's typically at a lower rate than you'd get with personal loans or even a home equity loan. There's no loan application or credit check, and your credit rating does not impact your interest rate. You can choose not to repay, but the outstanding loan balance will typically be deducted from your death benefit.
• Use cash value to pay premiums: You can typically use the money in your cash value to pay part or all of your policy premiums, making it easier to keep your coverage in place. This is a popular option for older policyholders who want to use retirement income for living expenses but still want to keep life insurance coverage.

It's important to remember that cashing out your universal life insurance policy may come with certain consequences, such as higher tax liabilities and reduced payouts to beneficiaries. Additionally, you will need to consider the reasons why you purchased the policy in the first place. Do you still need the coverage? Are the policy's beneficiaries depending on the death benefit? It's recommended to explore other options, such as borrowing against your 401(k) plan or taking out a home equity loan, before cashing out your universal life insurance policy.

Variable universal life insurance can be cashed out

Variable universal life insurance is a type of permanent life insurance policy that allows for the cash component to be invested to produce greater returns. It combines lifelong insurance protection with flexible premiums and a cash value that can be accessed while the policyholder is alive.

Variable universal life insurance policies are built like traditional universal life insurance policies but allow you to invest the cash value in the market via subaccounts. The return on the cash component is not guaranteed year after year, and it is possible to lose money.

There are several ways to access the cash value in a variable universal life insurance policy:

• Surrendering the policy: You can cancel the policy and take the surrender value cash payment. However, this option comes with surrender fees that can be significant, especially for newer policies. Cancelling the policy also means you will no longer have life insurance coverage.
• Withdrawal: You can take a cash withdrawal from the policy, which is often not subject to income taxes if it does not exceed the amount you have paid into the policy. However, this may reduce your death benefit, depending on the value of your cash account.
• Loans: You can borrow money through your policy, with the insurer using your policy as collateral. These loans typically have lower interest rates than personal loans or home equity loans, and there is no loan application or credit check required. However, the outstanding loan balance will typically be deducted from your death benefit.
• Use cash value to pay premiums: You can use the money in your cash value to pay part or all of your policy premiums, which can be helpful for older policyholders who want to continue their life insurance coverage while using retirement income for living expenses.

It is important to carefully assess the risks before purchasing a variable universal life insurance policy, as there is the potential to lose money, and the policy may include high fees and charges.

Frequently asked questions