Cashing Out Universal Life Insurance: Strategies For Beneficiaries

Universal life insurance is a type of permanent life insurance policy that offers lifelong coverage and financial security for you and your loved ones. While it can be a valuable investment, there may be circumstances where you need to access the cash value of your policy. This process is known as cashing out and can provide you with immediate financial liquidity. In this guide, we will explore the different ways to cash out your universal life insurance policy, the pros and cons of each method, and the key considerations to keep in mind.

Surrendering a universal life insurance policy

Universal life insurance policies accrue cash value over time, which can be used to supplement retirement savings, pay down a mortgage, or cover unforeseen costs. This cash value can be accessed in several ways, including through policy loans or by using the cash value to pay your premiums. However, if you need a large sum of money, surrendering your policy may be the best option.

When you surrender a universal life insurance policy, you will generally receive the cash value that has accumulated, minus any surrender fees and federal income taxes. Surrender fees are charged by the insurer and tend to be highest for newer policies. They may be as high as 35-40%, although they are usually lower, and some policies are not subject to surrender fees after 10-15 years. It is important to check your policy contract to understand the fees that may be incurred.

In addition to fees, you may also need to pay taxes on the gain from your policy. While the cash value grows in the policy, it is not taxed. However, once you withdraw it by surrendering the policy, the gain may be taxed as income. Consult a tax professional to understand the tax implications before making any decisions.

Before surrendering your universal life insurance policy, consider the consequences. You will lose your life insurance coverage, and your beneficiaries will no longer receive the death benefit upon your death. Additionally, you may face high fees and taxes that reduce the amount of cash you receive. There may be other options for obtaining cash, such as taking out a loan against your policy or using the cash value to pay premiums.

Withdrawing from a universal life insurance policy

Universal life insurance is a form of permanent life insurance that provides the ability for a much higher internal rate of return on the policy while also avoiding the risk of exposure within the market. Universal life insurance contracts have a cash value account that the policy owner can fund as much as they like, which then enables any cost of insurance charges to be removed from this account.

If you have a universal life insurance policy, you can withdraw money from it. However, there are some important things to consider before doing so. Firstly, withdrawals are usually only possible after a certain number of years, typically 10 to 15 years after the policy is issued. Secondly, withdrawals may be subject to taxes on any gains that exceed the total amount of premiums paid into the policy. It's important to consult with a tax professional to understand the tax implications of withdrawing from your universal life insurance policy.

Another important consideration is the impact on your death benefit. Withdrawing cash from your universal life insurance policy will likely result in a reduction in your death benefit, and this reduction may be greater than the amount withdrawn. This is because the cash value of your policy is used to fund the death benefit, so when you withdraw cash, there is less money available to pay out as a death benefit. Therefore, it's crucial to carefully review the terms of your specific policy to understand how withdrawing cash will affect your death benefit.

If you need immediate cash, there are alternative options to consider before withdrawing from your universal life insurance policy. These include taking out a loan against your policy, which typically has lower interest rates than a bank loan and does not affect your credit rating, or surrendering your policy in part or in full. However, it's important to note that these options may also have an impact on your death benefit, so be sure to weigh the pros and cons of each option before making a decision.

Before making any decisions, it's always recommended to consult with a financial professional or your life insurance agent to discuss your specific situation and explore all available options. They can help you understand the potential consequences and ensure that you make the best choice for your financial future and the protection of your loved ones.

Taking a loan from a universal life insurance policy

Universal life insurance is a type of permanent life insurance that has an investment savings component. It offers more flexibility than whole life insurance, allowing the policyholder to adjust their premiums up or down within a certain range. This can be helpful for people with variable incomes. However, this flexibility comes with fewer guarantees. For example, consistently making minimal premium payments can affect the rate of cash value growth and even the death benefit amount.

Universal life insurance policies build cash value that can be used to supplement income in retirement, cover college tuition, or be put towards a down payment on a home, among other uses. This cash value can be accessed in several ways, including taking a loan from the insurer using the policy as collateral.

When taking a loan from a universal life insurance policy, the insurer lends you the money, with the policy serving as collateral. This means that you do not actually withdraw any money from the policy itself, and the cash value can continue to grow. Interest is charged on the loan balance, and while there is no mandatory monthly payment, it is important to make interest payments to prevent the policy from lapsing. The loan can be repaid on your own schedule but must be repaid in full (with interest) upon death. If the loan remains unpaid when the policy lapses or is surrendered, the borrowed amount may become taxable if it exceeds the cash value.

There are several advantages to taking a loan from a universal life insurance policy. It provides quick access to funds without the need for a credit check, income verification, or approval process. The interest rates are typically lower than those for personal loans or credit cards, and there is no impact on your credit score. Additionally, the loan can be used for any purpose without restriction.

However, there are also potential downsides to consider. Taking a loan against your universal life insurance policy will generally reduce the death benefit, meaning your beneficiaries will receive less. If the loan and interest exceed the policy's cash value, the policy may lapse. In this case, you may owe taxes on the amount borrowed. Therefore, it is important to carefully consider the pros and cons of taking a loan from a universal life insurance policy before making a decision.

Selling a universal life insurance policy

Understanding Universal Life Insurance

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 and variable life, as 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.

Why You Might Consider Cashing Out

Universal life insurance policies are designed to provide lifelong coverage, but life can throw up unexpected challenges. For example, an individual might be diagnosed with a serious illness and find 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.

How Selling Works

When you sell your universal life insurance policy, you enter into a life settlement, where an investor purchases the policy and takes over the premium payments. In return, you receive a lump-sum payment, which is often higher than the policy's cash surrender value but less than the death benefit.

Key Considerations Before Selling

There are several factors to keep in mind before deciding to cash out your universal life insurance policy:

• Make sure you're getting a fair price. The value of your policy is influenced by factors such as your age, health, and the policy's death benefit.
• Loss of coverage. Once you sell your policy, you forfeit the life insurance coverage it provided. This is a critical point to consider, especially if there is any chance you might need the coverage in the future.
• Cashing in your investment. Selling your policy means cashing in an investment that you have built over many years. While this can be a strategic move, it's important to weigh all your options carefully.
• Consulting a professional. Consulting with a financial advisor or tax professional can help you understand the full implications of this decision, including any potential tax liabilities.

Eligibility Criteria for Selling Your Universal Life Insurance Policy

Generally, to sell a universal life insurance policy, the policyholder must have a serious illness, such as cancer, ALS, Alzheimer's, or heart disease, along with a policy of $150,000 or more. If the insured doesn't have a serious illness, they must be 75 or older with a universal life insurance policy of $150,000 or more.

Eligibility criteria for selling a universal life insurance policy

Universal life insurance is a popular form of permanent life insurance. It can accumulate cash value over time and also provide a death benefit to your beneficiaries. However, if your universal life insurance policy no longer serves its intended purpose, you may be able to sell it for cash through a life settlement.

The process of selling your universal life insurance policy can be broken down into a few steps. Firstly, you need to check your eligibility. To sell your universal life insurance policy through a life settlement, you generally need to be at least 65 to 70 years old and have a policy value of at least $50,000 to $100,000. If you meet these basic criteria, you can get an estimate of your policy’s value through a life settlement calculator.

The next step is to complete your qualification. A life settlement expert will ask you some questions about you and your policy and gather additional details from your life insurance carrier and healthcare provider. This information helps ensure they are able to make the highest offer possible for your policy.

Finally, you will receive an offer to purchase your universal life insurance policy. There is no obligation to accept this offer, so you can choose to decline it and keep the policy active. If you are happy with the offer and accept it, you will receive closing documents to sign and complete the transaction. At this point, you will receive the sale value minus any applicable taxes and fees. You will no longer have to pay premiums, and the buyer will become the new owner of the policy.

It is important to consider the implications of selling your policy. You will lose coverage and your beneficiaries will not receive a death benefit. You can only sell your policy once, so make sure you are satisfied with the value you get for it. If the payout you get exceeds the premiums you’ve paid, you’ll have to pay income tax on the proceeds.

Other options for cashing out universal life insurance

If you are unsure about selling your universal life insurance policy or want to explore other options, you can withdraw money from the cash value of your policy. The downside is that your death benefit will be reduced. You can also take out a loan on the cash value of your policy, which can be repaid to prevent your death benefit from being diminished. However, as a loan, you will also have to pay interest.

Another option is to surrender the policy back to the insurer, which is the same as cancelling it. When you do so, you will receive the cash surrender value and your coverage will end. However, the surrender value will be lower than what you’d get from selling it.

Frequently asked questions