Cashing Out Usaa Life Insurance: A Step-By-Step Guide

Cashing out a life insurance policy means accessing the cash value that has built up in certain types of permanent policies. This cash value accumulates over time as you pay premiums and can be accessed in various ways, such as by making withdrawals, borrowing against the policy, surrendering the policy, selling it, or using premium financing. USAA offers whole life insurance and universal life insurance, both of which are permanent life insurance policies that can build up cash value over time. While USAA does not explicitly mention cashing out life insurance policies, they do provide information on borrowing from your cash value and surrendering your policy, which are two common methods of cashing out.

Withdrawing from your policy

When you make a withdrawal, you can access a portion of the cash value while keeping your policy intact. This is a good option if you need a smaller sum of money but still want to maintain the policy for your beneficiaries. Withdrawals are generally tax-free up to the amount of the premiums you have paid. However, if the withdrawal exceeds the premiums paid, the excess amount may be subject to taxes. Additionally, withdrawals will reduce the death benefit, leaving less money for your beneficiaries.

The process for making a withdrawal can vary depending on your insurance provider. In some cases, it may take a few business days to a couple of weeks for the withdrawal to be processed. Be sure to check with your insurance company to understand the specific steps and timelines involved.

It is important to carefully consider the implications of withdrawing from your policy. While it can provide you with much-needed funds, it may also reduce the death benefit and potentially leave less financial protection for your loved ones. Additionally, there may be tax consequences if the withdrawal exceeds the total premiums paid. Therefore, it is always recommended to consult with a tax professional and a financial advisor before making any decisions.

By understanding the pros and cons of withdrawing from your policy, you can make an informed decision that balances your current financial needs with the long-term financial security of your family.

Borrowing against your policy

Borrowing against your life insurance policy is a way to access the cash value that has built up in certain types of permanent policies. This cash value accumulates over time as you pay premiums, and borrowing against it can be a good option if you need a large sum of money quickly.

USAA recommends that you first explore more traditional methods of borrowing, such as through your bank. Borrowing against your life insurance policy is not a standard option for term policies, as there is no cash value accumulation with term life insurance. However, if you have a permanent life insurance policy, you may be able to borrow against the cash value.

The process of borrowing against your permanent life insurance policy is straightforward and does not involve a credit check. You can simply call your life insurance company to initiate the loan process, as the cash value is yours if you ever decide to cancel the policy. The loan collateral is the cash value, making your life insurance company a willing lender. It's important to note that if you die, any unpaid loan and interest will be deducted from your death benefit.

The amount you can borrow depends on how much cash value is available in your policy. Some policies grow faster than others, and while you may be allowed to borrow up to 100% of the cash value, interest is charged on the loan amount. This interest can be fixed or variable, and it is calculated into the loan balance. Therefore, most life insurance companies will set a fixed limit, which could be up to 90% of the net cash value.

When considering a loan against your life insurance policy, it's important to understand the provisions of the loan, including repayment options. While paying back the loan is optional, it is encouraged to avoid a higher loan balance than the value of your policy, which could cause it to lapse. Additionally, keeping up with interest payments will help keep the policy active while the remaining cash value grows.

In conclusion, borrowing against your USAA life insurance policy can be a viable option if you have a permanent policy with accumulated cash value. It offers quick access to cash without the need for a credit check, but it's important to weigh the benefits against the potential impact on your death benefit and overall policy performance.

Surrendering your policy

When you surrender your policy, you receive the full cash surrender value, and there are no loan repayments or restrictions on how the funds can be used. However, you may have to pay surrender fees, and the cash surrender value could be taxable if it exceeds the premiums you have paid.

The process of surrendering your policy can take around two to six weeks, as the insurance company will need to process your request and determine the cash surrender value after deducting any fees.

It is important to carefully review each policy option and its impact on your long-term financial planning and overall goals. Consulting with a financial advisor or expert life insurance agent can help you determine the best path for your specific situation and ensure you balance your current needs with your family's future security.

Selling your policy

Find a reputable broker:

You will need to share information and documents regarding your policy with a broker. The broker will then let you know whether it is feasible to sell it. A good broker will be licensed through your state insurance department and won't rush you into a decision.

Make a sale:

The broker will research and likely match you with a buyer who will take over your policy. The buyer will pay the agreed-upon price and make the premium payments on your behalf. Once you pass away, the buyer will receive the death benefit payout.

Provide the details of your life insurance policy:

You will need to provide the broker or buyer with details of your life insurance policy, along with medical records. The buyer will calculate your life expectancy based on your medical records.

Receive an offer:

If the buyer is interested in purchasing your policy, you will receive an offer. You can then decide whether to accept the offer or not.

Transfer ownership:

If you accept the offer, you will make the buyer the new policy owner, and they will start paying your premiums. It is possible that the buyer could resell the policy to someone else who will then pay the premiums.

Confirm your status:

Occasionally, you will need to confirm that you are still alive by, for example, signing and returning a postcard sent by the buyer.

The buyer receives the death benefit:

When you pass away, the buyer, as the new owner of the policy, will receive the death benefit.

It is important to note that selling your life insurance policy has some potential drawbacks. These include:

• It can be challenging to determine whether you are getting a good price.
• Sales commissions can eat up a significant portion of the settlement.
• You may have to pay taxes on the money you receive, while the death benefit of a life insurance policy is usually tax-free for beneficiaries.
• If your family relies on you financially, they will no longer have the safety net of the life insurance death benefit when you die.
• If you use public assistance, a life settlement could make you ineligible.

Before selling your life insurance policy, it is recommended to consult with a financial advisor or tax expert to ensure you are making 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.
• The loan is repaid over time through installments, a policy loan, or from the life insurance proceeds after your passing.
• By financing the premiums, you may reduce or eliminate your out-of-pocket costs, preserving your liquidity and financial flexibility.

It's important to note that premium financing comes with certain risks. The interest rate on the loan may fluctuate, and if the interest rate rises, it could increase the overall cost of borrowing. Additionally, if the cash value of the policy or other assets used as collateral lose value, you may be required to provide additional collateral.

Before considering premium financing, it is recommended to consult with financial, estate, tax, and legal professionals to ensure that this strategy aligns with your specific circumstances and objectives.

Frequently asked questions