Ending Life: Insurance Money Payouts Explained

If you or someone you know is considering suicide, it is important to seek help immediately. Suicide is a serious and tragic issue, and there are resources available to provide support and assistance. While life insurance policies can provide coverage in the case of suicide, it is not a guaranteed payout. Many policies have specific provisions, commonly known as suicide clauses, that limit the payment of benefits. These clauses typically prevent insurers from paying out claims if the insured person's death is due to self-inflicted injury within a certain period, usually the first two years, of the policy being in force. However, after this exclusion period, most life insurance policies do cover suicide, and beneficiaries are entitled to receive the full death benefit.

Surrendering a permanent life insurance policy

Surrendering a life insurance policy means that you're cancelling it. You will no longer owe premiums and your beneficiary will not receive a death benefit payment. Surrendering a policy is usually only discussed in relation to permanent life insurance policies. While you can surrender a term life insurance policy, you won't receive any money in return, since the policy has no cash value.

The cash surrender value is the amount of money that will be returned to you upon surrendering the policy. This is the cash value minus any fees, loans, or premiums owed. Surrender fees typically range from 10-35% and are usually high in the early years of the policy, phasing out over time. Surrendering a policy also comes with tax implications. You may have to pay income taxes on the proceeds if the surrendered cash value exceeds the premiums you've paid into the policy.

There are several reasons why someone might surrender a life insurance policy. One of the main reasons is to access the cash value of the policy. If you no longer have anyone that depends on you financially, surrendering your policy would allow you to invest the surrender value elsewhere. Other reasons include:

• No longer needing coverage e.g. children are grown up and independent
• Costs: insurance premiums are expensive and can become unaffordable over time
• A better policy: your current policy may no longer be a good fit for your needs
• Cash needs: you may urgently need cash and surrendering your policy will award you a lump sum

If you're considering surrendering your life insurance policy, you must understand the policy terms and your loved ones' financial needs and expectations.

Cancelling a term life insurance policy

Understanding Term Life Insurance

Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years. It is designed to provide financial protection to your loved ones in the event of your death during the specified term. The premiums for term life insurance are typically fixed over the term, making it an affordable option for many individuals.

Reasons for Cancelling

There are several reasons why you might consider cancelling your term life insurance policy:

• You no longer need the coverage: If your family is financially independent and can manage without the death benefit, term life insurance may no longer be necessary.
• Changing investment strategies: You may find that the investment options offered by your permanent life policy are not as attractive as other financial vehicles, such as annuities or mutual funds.
• Affordability: If you are struggling to afford the premiums, you may want to cancel the policy to reduce your financial burden.
• Switching policies or companies: You may have found a new policy that better suits your needs, and therefore want to cancel your existing one.

Steps to Cancel

The process of cancelling a term life insurance policy is generally simple and can be done in a few steps:

• Review your policy: Before cancelling, carefully review the terms and conditions of your policy, including any applicable fees or penalties for early cancellation.
• Contact your insurance company: Get in touch with your insurance provider by phone or email and inform them of your decision to cancel. They may have specific requirements or forms that need to be completed.
• Stop premium payments: One of the easiest ways to cancel your policy is to stop making premium payments. If you have set up automatic payments, be sure to cancel them.
• Confirm cancellation: Contact your insurance agent or carrier directly to confirm that the cancellation has been processed and that you have no further obligations.
• Keep records: Maintain a written record of the cancellation and confirmation that your term life policy has been terminated.

Alternatives to Cancellation

Before cancelling your term life insurance policy, consider the following alternatives:

• Conversion to a permanent policy: Many term policies include a conversion rider that allows you to switch to a permanent policy without undergoing a new medical exam. This can be useful if you want lifelong coverage and the ability to accumulate cash value.
• Reduce the policy's face amount: If premiums are becoming unaffordable, you may be able to lower the policy's face amount, which will result in lower premium payments while still providing some level of coverage.
• Explore other insurance options: Shop around and compare rates from different insurance companies. You may find a more affordable policy that better suits your needs.

Remember, life insurance is meant to provide financial security for your loved ones in the event of your death. Before making any decisions, carefully consider your own situation and the potential impact on your beneficiaries.

Getting a loan from your life insurance policy

Borrowing from your life insurance policy can be a quick and easy way to get cash. However, it's important to understand the risks involved. Here are some key things to know about getting a loan from your life insurance policy:

Types of Life Insurance Policies

There are two main types of life insurance: term and permanent. Term life insurance lasts for a set number of years and only provides a death benefit. On the other hand, permanent life insurance, including whole life and universal life, lasts your entire lifetime and has two components: a death benefit and a cash account. The cash value of permanent life insurance policies can be used to take out loans.

How Life Insurance Loans Work

Certain types of permanent life insurance policies have a savings component that allows you to take out a loan from the insurance company. The cash value of your policy is used as collateral for the loan. There is usually no approval process or credit check since you are essentially borrowing from yourself. The loaned funds can be used for anything, such as supplemental retirement income, college tuition, or unexpected expenses.

Pros of Life Insurance Loans

Life insurance loans offer flexibility and quick access to funds without the need for a credit check or approval process. They also typically have lower interest rates compared to traditional loans or credit cards. Additionally, there are no usage restrictions on how you can spend the money.

Cons of Life Insurance Loans

One of the main risks of life insurance loans is that they can reduce the death benefit paid to your beneficiaries if the loan is not repaid before your death. The outstanding loan balance accrues interest, and if it exceeds the cash value of your policy, it may result in a policy lapse, leading to the loss of insurance coverage. There may also be tax implications if the policy lapses or is surrendered before the loan is repaid.

Repaying the Loan

Life insurance loans do not have a fixed repayment schedule, but it is important to make a plan to repay the loan to avoid negative consequences. Interest is charged on the loan balance, and if left unpaid, it will continue to accrue, increasing the total amount owed. Failure to repay the loan and keep up with premium payments may result in a policy lapse and potential tax consequences.

Selling your life insurance policy

Who buys and sells life insurance policies?

Life settlement companies buy life insurance policies and must be licensed to do so. In the US, they need a license from the state insurance department, for example, in Texas, it is the Texas Department of Insurance. Sellers are usually over 65, but younger people with certain medical conditions may also qualify.

Most types of life insurance policies can be sold, including permanent life insurance, whole life insurance, term life insurance, universal life, indexed universal life, and variable universal life policies. Group life insurance, government-issued, and employer-provided life insurance policies cannot be sold.

The process of selling a life insurance policy involves several steps:

• Evaluation: The policyholder provides information about their policy, medical history, and life expectancy to a life settlement provider or broker. The provider evaluates the policy to determine its market value.
• Market Research: The provider or broker explores the market to find potential buyers.
• Offers and Negotiation: Offers are presented, and the policyholder can negotiate the terms and choose the best offer.
• Transaction Completion: The buyer becomes the new policy owner and assumes responsibility for premium payments. The policyholder receives a cash payout, typically higher than the policy’s surrender value but lower than the death benefit.

The amount of cash you can receive depends on various factors, including your age, health condition, policy type, face value, and premium payments made. On average, policyholders receive around 20% to 30% of the policy’s face value.

• It can be challenging to determine if you are getting a good price.
• Sales commissions can be very high, eating up to 30% of the settlement.
• You will likely have to pay taxes on the money received.
• If family members rely on you financially, they will no longer have the safety net of the life insurance payout when you die.
• A life settlement could make you ineligible for public assistance.
• You may receive less money than if you kept the policy until maturity.

• Cash in your policy by surrendering it: If your policy has accumulated cash value, you can surrender it and receive the cash. However, this will terminate the coverage, and there may be surrender fees and tax implications.
• Change your insurance policy: If your policy no longer meets your needs, you can explore options to convert or exchange it for a different policy.
• Borrow from the insurance policy: Some permanent life insurance policies have a cash value component that allows policyholders to borrow against it.
• Use the accrued cash value to pay premiums: If affordability is an issue, you can use the policy's cash value to cover premium payments, maintaining coverage while reducing out-of-pocket expenses.
• Utilize the accelerated death benefit: Certain life insurance policies provide an accelerated death benefit, allowing policyholders to receive a portion of the death benefit if they are diagnosed with a terminal illness.

How to sell your life insurance policy safely

• Don't respond to life settlement solicitations. Find a life settlement broker through your financial advisor or life insurance agent.
• Get multiple offers: Shop around to get the best offer and understand your policy's worth.
• Research the broker's license status: Check for any complaints through your state insurance department.
• Remember, you don't have to sell just because you receive a bid.

Withdrawing from your life insurance policy

Understanding Your Policy

Before making any decisions, it is crucial to understand the specifics of your life insurance policy. Life insurance policies can be broadly categorized into term life insurance and permanent life insurance. Term life insurance provides coverage for a specified term, such as 10, 20, or 30 years, and typically does not accumulate any cash value. On the other hand, permanent life insurance, including whole life and universal life, offers lifelong coverage and usually includes a cash value component. This cash value grows over time and can be accessed in various ways.

Withdrawing Cash

One option for withdrawing from your life insurance policy is to make a withdrawal from the accumulated cash value. The amount you can withdraw depends on the type of policy you have and the company issuing it. Generally, you can withdraw limited amounts, typically up to the amount of premiums you have paid into the policy. Withdrawals from the cash value are usually not taxable up to your policy basis. However, withdrawals that exceed your basis may be subject to income tax. It is important to note that withdrawals will reduce your death benefit and may also impact the growth of your cash value account.

Taking a Loan

Another option is to take out a loan against the cash value of your policy. Most cash-value policies allow you to borrow money from the issuer, using your policy as collateral. The loan amount will depend on the value of the policy's cash-accumulation account and the contract's terms. The loan may be subject to interest, which, if not paid, will be added to the loan balance. It is important to note that any outstanding loan balance will reduce the death benefit that your beneficiaries will receive. Additionally, if the loan is still outstanding when the policy lapses or is surrendered, the borrowed amount may become taxable.

Surrendering the Policy

If you decide to withdraw a large amount or no longer need the life insurance coverage, you can surrender or cancel your policy. By surrendering the policy, you will receive the cash value minus any applicable fees and charges. Surrender charges are typically higher for newer policies and tend to decrease over time. Additionally, you may owe income taxes on the surrendered cash value if it exceeds the premiums you have paid into the policy. It is important to note that surrendering your policy means giving up the right to the death benefit, so your heirs will not receive any payment from the policy upon your death.

Selling the Policy

Instead of surrendering your policy, you may also consider selling it through a life settlement or viatical settlement. In a life settlement, the policy is sold to a third party, usually for more than the cash surrender value but less than the death benefit. This option is often considered by policyholders who are over 65 and no longer need the policy or can no longer afford the premiums. In a viatical settlement, the insured individual must have a terminal medical diagnosis and will receive a lump sum payment from the buyer. It is important to note that selling your policy will result in forfeiting the death benefit, and the buyer will assume responsibility for paying the premiums.

Weighing the Consequences

Frequently asked questions