Converting Life Insurance To Cash: Strategies For Success

Life insurance policies are often taken out to provide financial security for dependent children or to protect a business venture. However, over time, circumstances can change, and policies may no longer serve their intended purpose. One option is to convert your life insurance policy to cash. There are several ways to do this, including surrendering your policy and receiving a cash payment, taking out a loan from your life insurance company, or selling your life insurance policy. It's important to carefully consider your options and understand the potential consequences of each choice.

Surrendering a policy

Surrendering a life insurance policy means cancelling it directly through your insurer. The benefit of this is that you will be able to collect any and all remaining cash value. Your premium payments will stop and any saved value will be released to you. However, this amount can vary, and sometimes surrendering a policy results in no payout at all.

The process is generally quite simple. After contacting your insurer with your intent to surrender the policy, they should send you a form asking you to put your decision in writing. After sending this back to the company, they will release your funds. While these funds may be non-taxable income, there may be significant surrender charges if the policy is less than 15 years old.

To surrender your policy and receive the cash surrender value, you should:

• Review your life insurance policy documents: Gather your policy documents, such as the contract, riders, amendments, and premium payment receipts. Look for wording about cash surrender value, surrender charges, and other surrender-related terms in your documents.
• Speak with your insurer: Inform your life insurance provider’s customer service that you’d like to surrender your life insurance policy. They will guide you through the insurer’s process for surrendering the policy and paying the cash surrender value.
• Fill out paperwork: Your insurer may give you a policy termination form, surrender request form, or similar paperwork. Complete these forms, providing all information and documentation it asks for.
• Receive the cash surrender value: Your insurer will process your surrender request and determine the proper cash surrender value based on the policy’s terms. It will then pay you that amount via check or direct deposit.
• Consult with a tax expert and financial advisor: Receiving a large payout could trigger tax consequences, so consult with a tax expert to report everything properly. Furthermore, you may consider saving or investing your funds elsewhere. A financial advisor can help you pick the best place for these funds.

It is important to remember that if you surrender your policy fairly soon after purchasing it, there may be very little cash surrender value.

Getting a loan from your life insurance company

To borrow against your life insurance policy, you must have built up enough cash value. You can contact your insurer to initiate a policy loan, and the money is usually sent to you within a couple of days. There is no loan application or credit check, and the credit rating does not impact the interest rate. The interest charged by the life insurance company is typically lower than that of a personal loan or home equity loan.

The amount you can borrow is specified in your life insurance policy and is usually up to 90% of the policy's cash value. You must continue to pay premiums to keep your policy active. There is no set repayment schedule for the loan, but if you do not pay it back, the outstanding loan balance, including interest, will be deducted from the death benefit paid to your beneficiaries.

It is important to note that borrowing against your life insurance policy reduces the death benefit, so it is essential to consider the potential impact on your beneficiaries. Additionally, if the loan balance exceeds the cash value of your policy, the policy may lapse, and you may lose coverage.

Getting a loan from other lenders

If your life insurance policy does not allow loans, you may be able to use your life policy as security for a loan from other lenders. For example, a beneficiary or third party may be willing to give you a loan with an agreement to be repaid from the policy's death benefit.

To do this, you and the beneficiary named in your life insurance policy must agree on the loan amount and the terms of repayment. To protect the beneficiary giving you the loan, you will need to designate an irrevocable beneficiary (one that cannot be changed) or assign the policy (legally transfer the policy to another person). You will also need to agree on premium payments so the lender has assurances that the policy will remain in effect and not lapse.

It is recommended that you use an attorney to prepare the loan agreement, or at least have an attorney review the loan agreement before you sign the contract.

If you are an entrepreneur, you may be required to have a policy naming your lender as a collateral assignee in order to get a business loan. In this case, the lender will have first claim to your policy's death benefit if you default on the loan.

If you are unable to pay back the loan, the lender can either cash in the insurance policy for the cash surrender value or wait until you pass away and deduct the loan amount from your death benefit.

Using cash value to pay premiums

Universal and variable life insurance policies are often preferred because they allow you to use the policy's cash value to pay premiums. This strategy will only work for a short period if you start when the cash value is small or if interest rates are low. Additionally, you must carefully monitor the cash value to ensure it doesn't drop too far, or you may lose your coverage. However, if you have a large cash value with consistent returns, you can maintain coverage for years at little to no additional cost.

For example, if your annual premium is $5,000 and you have $100,000 in cash value, you would need the policy's cash value to net 2.5% interest annually to halve your premium payments while maintaining the full cash value.

Whole life insurance policies typically don't let you pay premiums using the policy's cash value, except if you convert to a paid-up policy. Not all insurers offer this option, but with a paid-up life insurance policy, the cash value is large enough that you can stop paying premiums out of pocket. Instead, you can use the cash value to pay premiums. The downside to paid-up whole life insurance policies is that each premium payment is deducted from the policy's death benefit. In addition, less cash value is available for other purposes, such as a policy loan.

How to Access Cash Value

There are several ways to access the cash value in your life insurance policy:

• Surrender: You can cancel the policy and take the surrender value in cash. However, 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 with a newer policy.
• Withdrawal: In many situations, you can take a cash withdrawal from your permanent life policy, and this money is often not subject to income taxes as long as it's not more than the amount you've paid into the policy. However, your death benefit will likely be reduced, and you may have to pay taxes on any amount withdrawn above the "cost basis".
• Loans: You can typically borrow money through your policy, although the amount varies. The money is not directly from your policy but from the insurer who uses your policy as collateral. Life insurance loans include interest payments, but they are typically lower than personal loans or even home equity loans. There's no loan application or credit check, and the credit rating does not impact your interest rate. You can choose not to repay, but the outstanding loan balance will 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, 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 life insurance coverage.

How Cash Value Works

When you make a premium payment for cash value life insurance, it is divided into three categories:

• Cost of insurance: The amount required to fund the policy's death benefit.
• Fees and overhead: The insurance company's operating costs and fees.
• Cash value: Your account within the policy, which accumulates value over time.

The cash value of your life insurance policy is separate from the death benefit, so your beneficiaries will not receive the cash value when you pass away. Any cash value left in your life insurance policy when you die is kept by the insurer. Therefore, it is essential to take advantage of the cash value that has built up in your policy while you are still alive.

Selling your policy

Selling your life insurance policy is a way to convert it into cash. This is known as a life settlement. A life settlement is the sale of a life insurance policy to a third party, known as a life settlement provider. The owner of the life insurance policy sells the policy and receives an immediate payment in return. The life settlement provider becomes the new owner of the policy, paying any future premiums and receiving the death benefit when the insured person dies.

There are some important things to consider before selling your policy. Firstly, life settlement companies are primarily interested in buying high-value policies from older policyholders. You will likely need a policy worth at least $100,000 and be over the age of 65 to sell your policy. Secondly, the life settlement company will take over your policy and pay the premiums, but this also means that your family will not receive the life insurance benefits. Additionally, you may have to pay taxes on the money received from the sale, and it could disqualify you from certain public assistance programs. It is also important to note that the proceeds from the sale may be accessible by your creditors.

Before selling your policy, it is recommended to consult a professional financial advisor, attorney, or accountant to determine if this is the best option for you. You should also consider other alternatives to access cash from your policy, such as taking out a loan or withdrawing money from the policy if it has accumulated cash value.

If you decide to sell your policy, be sure to get quotes from several life settlement providers to ensure you are getting a competitive offer. You can also use a life settlement broker, who will represent your interests and act according to your instructions. However, they must disclose the amount of compensation they will receive by the date the life settlement contract is signed.

Frequently asked questions