Cashing In On Life Insurance: Strategies For Success

Life insurance policies are often taken out to provide financial protection for loved ones after the policyholder's death. However, permanent life insurance policies, such as whole life or universal life, can also be used to access cash during the policyholder's lifetime. This can be done through several methods, including withdrawing from the policy, borrowing against it, surrendering it, selling it, or using premium financing. Each method has its own advantages and disadvantages, and it's important to carefully consider the potential impact on the death benefit and tax implications before making any decisions.

Withdraw from your policy

Withdrawing from your life insurance policy is one of several ways to access the cash value of your policy. Here's what you need to know about this option:

How It Works

Withdrawing from your life insurance policy allows you to access a portion of the cash value that has built up in your policy while keeping the policy intact. However, this will result in a reduced death benefit for your beneficiaries. The amount you can withdraw depends on the cash value of your policy, which is determined by factors such as the type of policy, the amount of insurance, and how long you have had the policy.

Advantages

Withdrawals from your life insurance policy are generally tax-free up to the amount of the premiums you have paid. This option allows you to keep your policy active and provides access to cash without taking on a loan.

Disadvantages

The main disadvantage of withdrawing from your life insurance policy is the reduction in the death benefit for your beneficiaries. The reduction may be greater than the amount withdrawn, depending on the specific terms of your policy. Additionally, if the withdrawal exceeds the premiums paid, the excess amount may be subject to income tax. Withdrawals may also be subject to partial surrender charges.

Considerations

When considering withdrawing from your life insurance policy, it is important to weigh the advantages and disadvantages carefully. This option may be best for those who need smaller sums of cash but want to maintain the policy to provide a death benefit for their beneficiaries. It is also important to note that not all policies allow for partial withdrawals, and the time it takes to process a withdrawal can vary depending on your insurance provider.

Borrow against your policy

Borrowing against your life insurance policy can be a quick and easy way to get cash, but there are some specifics to know before you borrow. 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 cheaper and more suitable for many, does not have a cash value.

Here's how borrowing against your life insurance policy works:

How It Works

You can take out a loan against the cash value of your policy, using the cash accumulation as collateral. There is no credit check required, and repayment is flexible—you may even choose not to repay, though this reduces the death benefit by the loan amount plus interest.

Pros

Loans are typically tax-free. There is no need to pass a credit check, and you have flexible repayment options.

Cons

Interest accrues on the loan, and unpaid loans reduce the death benefit. If the loan plus interest exceeds the cash value, the policy may lapse. If the loan is still outstanding when the policy lapses or if you surrender the insurance, the borrowed amount becomes taxable if the cash value (without reduction for the outstanding loan balance) exceeds your basis in the contract.

Reasons to Borrow Against Your Policy

• You need extra cash fast: Life insurance loans don't have any additional requirements, such as a credit check, employment verification, or minimum income requirements, so you can easily get money when you need it.
• You don't want to risk other assets: Because your policy's cash value is used to secure the loan, you don't have to put other assets at risk.
• You don't want a repayment schedule: You can pay back your loan whenever you want, rather than being tied to a repayment schedule.
• You want to avoid loan restrictions: There are no restrictions on how you can spend the money.

The limit for borrowing money from life insurance is typically set by the insurer, and it's usually no more than 90% of the policy's cash value.

You can borrow from a life insurance policy as soon as there is enough cash value built up to take a loan in the amount you need. Depending on how your policy is structured, this can take several years to accrue.

Remember, borrowing against your life insurance policy can provide much-needed financial relief, but it's important to carefully review each policy option and its impact on your long-term financial planning and overall goals. Consult with a financial advisor or expert life insurance agent to determine the best path for your situation.

Surrender your policy

Surrendering your life insurance policy means giving it up in exchange for the cash surrender value. This is usually a last resort, as it cancels the policy and the death benefit is forfeited.

Step 1: Contact your insurer

Get in touch with your insurance provider and inform them of your intention to surrender the policy. Ask them about the surrender value and any associated costs, such as surrender charges or taxes.

Step 2: Receive and complete the surrender form

Your insurance company will likely send you a form to fill out, confirming your decision to surrender the policy. This may require you to put your decision in writing.

Step 3: Return the form and receive your funds

After completing the necessary paperwork, send it back to the insurance company. They will then process your request and release your funds, usually within a few weeks.

Things to Consider:

• Surrender Fees: There may be surrender fees or charges, especially during the early years of the policy. These fees are typically higher for newer policies and often don't apply after 10 to 15 years.
• Tax Implications: The cash surrender value may be subject to income tax if it exceeds the total amount of premiums paid into the policy. Consult a tax professional to understand the specific tax implications for your situation.
• Loss of Coverage: Surrendering your policy means you will no longer have life insurance coverage, so your beneficiaries will not receive a death benefit.
• Alternative Options: Before surrendering your policy, consider other options such as withdrawing funds, taking out a policy loan, or selling your policy through a life settlement. These alternatives may provide access to cash while retaining some level of coverage.

Remember to carefully review the impact of surrendering your policy on your long-term financial planning and overall goals. Consult a financial advisor or expert life insurance agent to make an informed decision that balances your current needs and your family's future security.

Sell your policy

Selling your life insurance policy is an option if you no longer need the death benefit, face financial hardship, or want to reduce or eliminate premium payments. This option is also known as a life settlement.

A life settlement involves selling your policy to a third party or life settlement company. You will receive a cash payment, typically more than the cash surrender value but less than the death benefit. The buyer takes over paying premiums and eventually collects the death benefit.

You will likely need to meet certain criteria to sell your policy. For example, you may need to be over 65 and have a policy with a death benefit of at least $100,000. Life settlement companies are primarily interested in buying high-value policies from older policyholders.

There are several things to consider before selling your policy:

• You will no longer have life insurance coverage, and your beneficiaries will not receive a death benefit.
• There may be fees and taxes associated with the sale, reducing the amount you receive.
• The money from the sale could disqualify you from certain public assistance programs, such as Medicaid.
• The money from the sale may not be exempt from creditors.
• The new policy owner will have access to your past medical records and may be able to request updates on your current health.

If you are considering selling your life insurance policy, it is important to consult a financial advisor or tax professional to understand the potential consequences and ensure it is the best decision for your situation.

Premium financing

Here's how it works:

• You borrow money from a third-party lender, typically a bank, to pay the premiums on your life insurance policy.
• The policy and its cash value are assigned to the lender as collateral for the loan.
• The loan is repaid in installments over time, or through a policy loan, or even from the life insurance proceeds after your death.
• By financing the premiums, you can keep your policy in force and retain the death benefit, while also reducing or eliminating your out-of-pocket costs.
• Tax efficiency: The structure of premium financing can help exempt insurance proceeds from estate taxes, preserving more wealth for your heirs.
• Asset protection: It can protect your heirs from having to sell assets to cover taxes or debts after your death.
• Financial flexibility and liquidity: Premium financing allows you to preserve your capital and maintain liquidity, which can be used for other investments or financial priorities.
• Goal-oriented funding: The insurance proceeds can be used to fund a variety of needs, including estate planning and business succession.
• Flexible loan repayment: You have multiple options for repaying the loan, including using the policy's accumulated cash value or your regular cash flow.

However, there are also some risks and considerations to keep in mind:

• Interest rates: Fluctuating interest rates can increase the cost of borrowing, making the financing less favourable than expected.
• Collateral requirements: If the life insurance policy or other assets used as collateral lose value, you may need to provide additional collateral.
• Policy performance: The policy's cash value growth may not meet projections, leaving less money available to repay the loan.
• Complexity: Premium financing can be complex due to the various moving parts, such as collateral management and interest rate fluctuations. It requires careful financial planning and guidance from experienced professionals.

Frequently asked questions