Withdraw Funds From Cash Value
Its also possible to take withdrawals from your policy. If the amount you withdraw includes investment gains, often referred to as the part above basis, that portion is taxable. As with taking a policy loan, making a withdrawal will reduce the life insurance payout to your beneficiaries later on.
Pay Your Premiums With The Cash Value
Variable and universal life insurance policies are often favored because they allow you to use the policys cash value to pay premiums. This strategy will only work for a short period of time if you start while the cash value is too small or if interest rates are low. In addition, you have to carefully monitor the cash value to make sure it doesnt drop too far, or you may lose your coverage. But if you have a fairly large cash value with consistent returns, you can keep coverage in place for years at little to no additional cost.
For example, say your annual premium is $5,000 and you have $100,000 in cash value. You would just need the policys cash value to return a net 2.5% interest annually to cut your premium payments in half while maintaining the full cash value.
Whole life insurance policies typically dont let you pay premiums using the policys 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. You 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 policys death benefit. In addition, less cash value is available for other purposes, such as a policy loan.
What If I Dont Use My Cash Value
After a time, the cash accumulations in a policy can grow larger than the “face value” or death benefit. If you’ve accumulated cash value that you do not intend to use in other ways, the cash value can increase the amount of death benefit to your beneficiaries instead.
Thinking about getting a universal life or whole life insurance policy to protect your family and help build your financial future? You should talk things over with someone who can help you decide exactly which type of policy is right for you. A lot will depend on your age, financial situation, family status, and other factors. If you dont have a financial professional to discuss insurance with, Guardian can help you learn more about buying life insurance or even find a nearby financial representative who will listen to your needs and help guide you to a solution.
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Sell Your Life Insurance Policy
Policyowners frequently outgrow the usefulness of their life insurance. Many believe their only options are to let the policy lapse or surrender it to the insurance company.
The truth is that you can turn your policy into cash with a life settlement. You can even keep a portion of your policys coverage without having to make future premium payments.
Coventry Direct is an affiliate of Coventry First, which has been named the top life settlement company year after year, helping tens of thousands of policyowners evaluate their life insurance settlement options. Dont settle for less than you deserve.
Settle for More.®
Leveraging The Cash Value In Your Life Insurance Policy
If you’re thinking about accessing some of the cash value in your permanent* life insurance policy, there are a few things you should know.
One of the benefits of owning a permanent life insurance policy is the cash value that can accumulate. With life insurance such as whole life, universal life insurance, or variable universal life, a portion of your premium is credited to the policy’s cash value and can be used while you’re alive and in a variety of different ways.
- Take out a policy loan that borrows against your policy’s cash value when you need money.
- Adjust your premiums .
- Let the cash value grow and use it to supplement your income in retirement.
- Sell your life insurance policy for cash in a transaction called a life settlement.
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What Is Cashing Out A Life Insurance Policy
Cashing out a life insurance policy refers to the process by which policyholders can access accumulated cash value from their policies before their death. Normally life insurance works by policyholders paying premiums in exchange for coverage that provides a death benefit upon their passing, and some policies also have living benefits to help fund retirement. However, policies that accumulate cash value such as whole, variable, universal life insurance may allow the policyholder to access some of that money while theyre still alive through loans, withdrawals, surrendering it, or selling the policy.
Surrendering The Policy For Cash
You can surrender your policy entirely to get the full cash value, minus any surrender charge. And youll have to pay taxes on any gains earned on the cash value portion of the policy. Plus, youll be giving up your life insurance coverage because surrendering a policy terminates it.
Surrendering a policy is always the absolute last resort, Abrams says. If youre considering ditching your policy because youre having trouble paying the premiums, you do have other options if you cant pay your life insurance bill.
For example, you could reduce the policys face value to lower your premium, or use the cash value to convert the policy to paid-up status to keep some amount of coverage in place. You also can tap the cash value in your policy to pay your life insurance premiums temporarily if youve fallen on hard times. If you do this, be cautious not to deplete so much cash value that your policy lapses.
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How To Cash Out Life Insurance
Cashing out life insurance is easy you will need to let your insurance company know that you want to surrender your policy. It is important to know, though, that before you do that, you should read all the details of your policy to understand the financial consequences and, in particular, what will be your net surrender cash value, inclusive of any fees. For whole life policies, consider surrendering after the annual dividend has been declared, otherwise you may be leaving money on the table.
Buyer beware Be aware of any potential tax consequences from the surrender of your policy and review your life insurance needs with a qualified life insurance broker first.
Policy Loan Pros And Cons
Pros: No loan application or credit check. You can repay the loan on your own schedule, and the money goes back into your policy instead of to a lender. You may earn a positive arbitrage on the money you borrow.
Cons: The interest rate may be higher than other options. The loan will be subtracted from the death benefit if you dont pay it back.
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How To Use The Cash Value From Your Life Insurance
If youd like to use your cash value account prior to your death, you can do so in the following ways.
- Make a partial withdrawal: You can withdraw money straight out of your cash-value account, but theres a catch: when you do, the amount of money your beneficiaries receive when you die decreases. Even though its money that you deposited, if you use it, your life insurance policy goes down.
- Take out a loan: You can take out a loan against the cash value youve built up. However, consider this: Youre going into debt over money thats yours, and youre paying interest on top of it. Should you be unable to pay it back before you die, your death benefit to your family will decrease.
- Pay your premium: Use any amount of money youve accumulated to pay for your monthly premium. Depending on which life insurance company you work with, there may be a withdrawal fee to do so.
- Sell your policy: Once all of your children have grown up or you dont feel as if there is a need to have life insurance anymore, you can sell your policy for a cash settlement. The agent who set you up with your insurance will receive a cut from your settlement.
- Surrender your policy: Instead of selling your policy, you can instead surrender it. Any cash value youve built up over the years will be given to you after numerous fees are taken out. If the cash value is more than youve paid in premiums over the years , youll be taxed on any profits youve made.
Option Four: Surrendering Your Policy
In this circumstance, you can cancel your life insurance policy you can surrender it and use the cash however you like. But, should you cancel the policy within the early years of owning it, you will probably have to pay surrender fees that will lower the cash value you receive.
Again, the rules vary with each life insurance company. You may, therefore, have to pay income tax or other taxes associated with surrendering your policy. You also forfeit the death benefit connected to your life insurance policy.
What To Know About Cashing Out Life Insurance
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Paying life insurance monthly premiums may become a burden for policyholders who are facing money constraints. This feeling worsens with the realization that life insurance benefits can be availed only after the death of the policyholder. However, one fact that many policyholders dont know is that they can cash out life insurance before death.
In tough financial times, people are sometimes left scrambling for cash to meet their expenses and lifestyle demands. In situations like these, policyholders can consider cashing out their life insurance as a solution to a financial crisis. While cashing in your life insurance policy is a big decision that can have a significant influence on your financial life, at times it becomes a necessity.
To help you determine if you should cash out a life insurance policy, well explain everything you need to know about the process. Learn what cashing out a life insurance policy means, your options for doing so, along with the pros and cons of this option.
Should I Cash In A Whole Life Insurance Policy
This is a far more complicated and vital question to answer. Just because whole life policies can be cashed in does not necessarily mean that they should. The amount that is cashed in is deducted from the death benefit which means that the policy will pay out less in the event of death should the amount withdrawn from the policy not have been repaid in time.
Remember that cash value withdrawals are not free of charge, and interest will be charged on the amount that has been withdrawn. If the amount is not paid back, interest will continue to accrue. This and the tax implications should be taken into account before deciding to withdraw.
Whether or not to cash out depends mostly on an individual or personal circumstances or events, and the decision may differ significantly from one person to another. For each, the following factors should be taken into account before cashing out:
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After 2 Or 3 Years Of Owning The Policy
The first few years of the policy are considered the surrender period, which has different rules than the rest of the policyâs lifespan.
Some insurers wonât return any cash value amount if you surrender your policy during this period, while other insurers will apply steep penalties in order to recoup their own expenses from selling and setting up the policy.
Can I Withdraw Cash From My Life Insurance Policy
One of the most significant benefits of permanent insurance is that it builds cash value that can be used to supplement income in retirement, to cover college tuition, as a down payment on a home, or other large purchases.1,2 But, how can you get the cash from your life insurance policy? This article will help answer three key questions:
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Should You Choose A Life Insurance Policy With Cash Value
Cash value is an attractive option for some life insurance buyers, but shouldnt be your first investment option. Instead, first maximize other savings options like IRAs and 401s.
If youre a high-income earner and youve already maxed out your retirement account contributions and want an additional account for tax-deferred savings, a cash value life insurance policy might be a good fit.
If you just want life insurance for covering financial obligations with a known end, like a mortgage or a childs college tuition, a term life insurance policy is a better fit.
Borrow From The Policy
Many policies allow you to borrow against the cash value. Borrowing against life insurance may be easier than getting a loan elsewhere because theres no credit check and a flexible timetable for repayment. When you take a life insurance loan, youre generally expected to repay it with interest at some point. If you die before paying it all back, the amount you owe is deducted from the benefit paid to your heirs.
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Other Important Features Of Whole Life Insurance
Whole life insurance is tax-efficient which means it helps your money grow faster because the interest earnings within the account arent taxed. If you buy your policy from a mutual insurance company, you may also receive annual dividend payments based on the financial performance of that company each year.3 These dividend payments arent guaranteed, so check on the track record and the current financial ratings of the insurance company before you purchase. Some companies pay dividends year after year, and they can add up in your account. Whole life insurance also has a guaranteed level premium, meaning that the monthly payments you make wont increase over time. So while whole life insurance costs more in the early years, in the long run, the payments may seem like a remarkable deal for life insurance that cant be canceled by the insurance company, regardless of how old you get or whatever occurs to affect your health.
Don’t Throw Away Your Cash Value
Many policyholders do not make the most of the cash value in their permanent life policies, especially if they no longer need the death benefit. When the policyholder dies, their beneficiaries receive the death benefit, in lieu of any remaining cash value. But if there is no need to pass the death benefit on to beneficiaries any longer, the policyholder can access the accumulated cash value while still alive, either by surrendering the policy entirely or by making smaller withdrawals or policy loans.
Note that taking cash out of a policy will also reduce the death benefit. Taking a policy loan is a viable option if the policyholder needs cash at the moment but would like to keep the death benefit for the future, repaying the loan amount over time.
Below, we show you some options you have with your life insurance policy cash value, including six popular strategies to help you make the most of that cash value in your permanent life insurance.
Permanent life insurance offers both a death benefit and a cash-value amount but on death, beneficiaries only receive the death benefit. Any remaining cash value goes back to the insurance company.
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Increase Your Death Benefit With Paid
If you have a sizable cash value but dont have a use for it, you may be able to increase the amount of money left to your beneficiaries. This option isnt always available, so youll need to check with your insurer, but its a simple way to make sure your family doesnt just lose the cash value youve built up over time.
Similarly, if you have a participating whole life insurance policy from a mutual insurer, you can use any dividends you receive to purchase paid-up additions. Buying paid-up additions is similar to buying a small single-premium life insurance policy as you increase the policys cash value and death benefit but dont have ongoing payments.
Finally, there are no medical exams or underwriting requirements involved in buying paid-up additions, so you can increase your coverage even if your health has gotten worse.
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.
Withdrawals From A Life Insurance Policy
Depending on your policy contract, you may be able to withdraw some of the cash value that has accumulated in your life insurance policy. The amount you withdraw may have tax implications for you and will also reduce the death benefit your beneficiaries receive. Research all the implications of making a withdrawal prior to doing so.
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Can I Sell My Whole Life Insurance Policy
Rather than surrendering your life insurance policy, there is another way to even further maximize this source of income: a life settlement. Did you know you can sell all or a portion of your life insurance policy, even term insurance? Working with the experts at Life Settlement Advisors, you can actually find a buyer for your life insurance policy and get as much as 4-8 times the cash surrender value.
Selling a whole life insurance policy in a life settlement is a strategy to get far greater returns than a surrender. On average,every $100,000 in life insurance policy value will only gain back $460 in surrender value. This means even a $1 million whole life policy will be surrendered for around $4,600 in cash. Depending on how long you have held the policy, this may not even cover the investment you have made through premium payments. By comparison, a life settlement pays out an average of 22% of the policys face value. The same $1 million whole life policy would be sold in a life settlement for $220,000 or more, over 50x more than the cash gained by surrendering the policy. Additionally, you can sell only a portion of the whole life policy. This allows you to gain cash now while also maintaining some of the investment for your beneficiaries.