How Can You Access Cash
Accessing the cash is fairly simple. Cash-value life insurance policies such as whole life insurance and universal life insurance build reserves through excess premiums and earnings. These reserves are deposited in a cash accumulation account which is within your life insurance policy.
Then you will have the opportunity to access this cash through withdrawals, policy loans or partial or full surrender of the policy. However, there is another method of obtaining cash which is called life settlement in which you can sell your life insurance policy in return of cash. Another option would be to surrender life insurance policy for cash value in which you can cancel your policy and use the cash for anything you want.
Nevertheless, whatever option you choose to obtain cash, you need to keep in mind that there will be consequences of using that cash. It will be deducted from your death benefit and the future of your family can be affected. Which is why it is not usually encouraged to use the cash from a life insurance policy even though it might help you during stressful financial times.
All You Need To Know About Cashing Out Your Life Insurance Policy
Although life insurance is used for mainly one thing and that is to support the insureds family after their passing. However, it has multiple other benefits too that act as an incentive for people to purchase a life insurance policy.
One such benefit is cashing in life insurance before death.
How To Calculate The Cash Value Of Life Insurance
;The cash value of your insurance is typically shown on your statement together with your surrender cash value.
An example on the left illustrates where you should be searching for this value in your policy. A section called guaranteed cash value highlights the amount your policy has accumulated over time.
If you are not sure about the number, your insurance company or insurance broker should be able to provide this figure.;Make sure you get it in writing.
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Alternative To Cashing Out A Policy: Personal Loans
If youre in a pinch for cash but dont want to sacrifice your life insurance policy, you may want to consider applying for a personal loan. Available from banks, credit unions and personal lenders, personal loans can provide quick access to funds at reasonable interest rates. As with any major financial decision, you should always consult an accountant or financial advisor to determine whats best for your situation.
The Dangers Of Life Insurance Policy Loans Forbes Advisor
Sep 29, 2020 When you borrow money from your life insurance policy, you are borrowing your own money. It is essentially an advance of money that could be;
Youre technically not borrowing from your policy. Youre borrowing from the life insurance companys general fund and using your cash value and death benefit;
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Adding Riders For Extra Coverage
Most types of life insurance have options for adding policy riders that tack on extra coverage or features. One of the most common is an accelerated death benefit, which is often automatically included. This gives you access to your own death benefit money while youre still alive if youre diagnosed with a terminal illness. It can be useful for paying medical bills and other unexpected costs.
Similar riders for chronic illness and long-term care will also let you tap into your own death benefit if you have certain medical conditions. Your life insurance agent can tell you the rider options available with your policy before you buy it.
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.
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How To Surrender Your Policy
Surrendering your life insurance policy is a relatively simple process.
If you want to cancel your coverage:
This process is the same for both permanent life insurance and term life insurance.
The cash surrender value is, therefore, the amount of money that you will get after all fees and charges have been assessed, and it will be less than the policys actual cash value during the surrender period. This form of income differs from what you get from a viatical settlement, life settlement or an accelerated benefit rider, because it is coming from the cash value and not the death benefit.
All types of permanent life insurance policies have a surrender period. This is an initial period of time that must lapse before the policy accumulates any cash value or no surrender charges are assessed.
How Much Money Will I Get For My Life Insurance Policy
Surrender values are a function of how the life insurance policy has been funded over time.; Life settlement values depend upon many factors, including the policys ongoing cost and expenses and the insureds underwriting.; While average valuations are; about 20% of your policy’s face value, the range is very wide reflecting the many different variables of every policy priced.;;;
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What Is Cash Value
When you buy a cash value life insurance policy, the premium you pay doesnt just go toward the death benefitthe amount thats paid to your beneficiaries when you die. It also goes toward a cash value account and internal policy costs.
The;cash value in a life insurance policy;grows at either a fixed or variable rate, depending on the type of policy you have. A whole life insurance policy;will have a fixed interest rate and usually pays dividends that will help the cash value grow. Universal life insurance;often has variable rates, so cash value growth will depend on investment performance.
The cash value grows tax-deferred. You can even take cash out of a policy tax-free if you use the right strategy to access the cash.
Cash Surrender Value Taxes
In most cases, the cash surrender value that you receive will be considered a tax-free return of principal up to the amount of premiums that you have paid.
For example, if you have been paying $250 a month into a $100,000 whole life policy for 30 months, then you could expect the first $7,500 of cash value to be tax-free because you have paid that much in premiums.
However, any dividends, interest or capital gains that were paid to the cash value will be counted as taxable income. Therefore, if you earned $800 in dividends from your whole life policy while it was in force, then you would have to pay taxes on that income. Your financial advisor or life insurance agent should be able to tell you what the tax ramifications will be if you cash in your policy.
Any amount that you receive over the total amount of premiums you paid is taxed as ordinary income. This means that you will pay tax on this amount at your top marginal tax rate.
For example, say that you are in the 25% tax bracket and you paid a total of $10,000 of premiums into your cash value policy.
Your cash value is now worth $13,000, and you decide to surrender your policy. You pay $1,000 in surrender charges and receive a check from the insurance company for $12,000. You will pay tax on $2,000 at a rate of 25%.
The other $10,000 is considered a tax-free return of principal.
However, any outstanding loan amount that remains when the policy is paid out will be subtracted from the death benefit.
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Find Out If You Are Eligible For A Life Settlement
There are several trustworthy life settlement companies online offering free life settlement calculators. To find out if you qualify for a life insurance settlement and to get an estimate of how much your life insurance policy is worth, youll need your policy type , premium, face value, and insureds age.;
How To Find The Top Life Insurance Companies That Allow You To Cash Out
A life insurance policy can be an excellent financial tool, even if life insurance rates for life insurance companies that allow you to cash out tend to be higher.
If you choose to buy life insurance that allows you to cash out, you can use your policy if youre in a pickle financially or if you would like to take out a loan that you wont have to pay back. Just remember that whatever you take out of your policy while youre alive will affect your death benefit.
Ready to buy life insurance? Enter your ZIP code to get free quotes from life insurance companies that allow you to cash out near you.
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Sell Your Policy For Cash
You can get more than the cash value of your policy by selling it to a third party through a process called a life settlement. The third party will pay you a lump sum thats less than the death benefit on the policybut more than the cash value. The buyer will then pay the policy premiums. When you die, the investor collects the death benefit.
You could consider a life settlement if you have an immediate need for cash that trumps the need for life insurance.
You must be a certain agetypically 65or have a certain level of health impairments in order to qualify for a life settlement. Youll have better chances of selling your policy the older you are, says Lucas Siegel, CEO of Harbor Life Settlements.
You can be younger than age 65 to sell a life insurance policy through a life settlement, but you generally must be very ill. Life settlements are calculated by understanding your life expectancy, and most third-party buyers prefer to purchase policies with a life expectancy of 10 years or less, he says.
Being highly qualified by age and health condition also will help you get a bigger payment. Work with reputable life settlement companies, and get offers from more than one company.
Be aware that there can be fees associated with life settlements, and youll pay income taxes on the amount you receive from the sale of the policy.
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When You Shouldnt Take A Life Insurance Policy Out On Someone Else
For a life insurance policy to go in force, the insured individual must sign for the policy and verify their medical information. Purchasing a policy without this information is insurance fraud, and repercussions can include denied claims, canceled policies, and in some cases, prosecution. Make sure to always be honest on a life insurance application so you donât risk losing any necessary financial support.
Use The Policy As Collateral With A Third
Another way clients can get cash is to approach a bank or credit union.
Like before, the life insurance policy is assigned as collateral to secure a line of credit or a loanbut the lender is external.
While there is no taxable income, clients still have to pay interest, which can be higher than typical bank loansthe rate depends on the lender. And clients must get approved, so lenders will assess creditworthiness, as well as the collateral.
Schochet adds that, with WL, the bank loan generally cannot exceed 90% of the cash value; with UL, its 75% if its in guaranteed investments like GICs .
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You Can Surrender The Policy
;With whole life:
This means you tell your insurance company you want to give up the policy and get the entire cash value youve built up in one lump sum. Sounds easy enough, right? But youll have to pay a fee to the insurance company,;and;youll be taxed on the amount you receive if its more than what youve paid in premiums over the years!
With universal or variable:
Surrendering your policy has the same results as with whole life. Giving up the policy and cashing in your cash value comes with fees. Oh, and dont forgetbecause youve surrendered the policy, youve also ended your life insurance coverage. ;
When You Might Want To Cash Out Your Policy
Permanent life insurance policies provide a lifetime of financial protection for you and your family. However, there are many reasons to cash out your life insurance policy. From financial hardships to changes in lifestyle, heres some situations when you might consider using some or all of the cash value of your policy.
You found an insurance provider with better options
There are many insurance providers that are eager to accept your premium payments. Whether you found another provider with better coverage or a policy that is more suitable for your lifestyle, sometimes there are better options out there. If youre wondering what options you may have, check out some life insurance providers below.
You no longer need coverage
If your beneficiaries have passed away or dont rely on your financial support, you may not need coverage. Selling or surrendering your policy provides an influx of cash to help you in the later years of life.
You have large financial commitments
Whether youre buying a new home, funding a childs education or simply need cash quick, loans, surrenders and settlements can provide funds fast.
Youre in debt
If you owe money, borrowing from your life insurance policy is an option to get you out of debt. Interest rates are much lower than credit cards and other types of loans, so this option may help you save money while reducing debt.
You want to reduce your premiums
You have poor credit and need cash fast
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You Can Pay Your Life Insurance Premium With The Cash Value
Whether you have whole life or universal/variable:
Some folks use their cash value to pay for the monthly or annual premium itself. Thats if theyve built up a big pile of cash,;of course! But this makes no sense, because the whole point of cash value life insurance is to use the cash value to spend on the fun stuffnot to use those savings on the actual life insurance bill. This is;not;smart financial planning. ;;
Notice how all of these ways of accessing the cash value come with a catch? Youll either slash your death benefit, face a heavy tax, or pay a fee. Getting a hold of the cash value without any consequences to you isnt in the insurance companys interests. Its how they make their money, and yet another reason to stay away from cash value life insurance.;
Taxes When Cashing Out A Life Insurance Policy
The most obvious benefit to life insurance is the death benefit — what your beneficiaries receive when you die. However, some policies, such as whole life policies, have an investment component that lets you build cash value inside the policy that you can withdraw while you’re still alive. Depending on your circumstances, you might have to pay income taxes on part of your withdrawal.
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Do You Need Life Insurance
Lets say you have run the analysis and determine you do have a need for life insurance. Does that then mean these cash value life insurance policies are right for you?
Even if you do have insurance need, you should first compare your current policy to lower price alternatives such as term insurance. We find a lot of our clients are much better suited with term insurance and investing in Roth IRAs, or even taxable brokerage accounts, compared to some of these insurance policies.
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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