Ways To Cash Out A Life Insurance Policy
There are three ways that you can cash out your life insurance policy while youre still alive:
Not all options are available to everyone, as some have requirements related to age, health, and policy details.
If you have several ways to cash in a life insurance policy, the best option depends on several factors like whether you want to keep the policy or not and the amount of money that you want to access. To help you understand your options, heres more information on the ways to cash out a life insurance policy while youre still alive.
If you have permanent life insurance and want to tap into the policys cash value, you can do it in three ways:
Should I Take A Loan From The Life Insurance Policy
Second, do you want to remove it all or just a portion of it. If you only want to withdraw a portion of the money it may make sense to take a loan from the policy for that amount. In this situation you would pay interest on the loan but not have to pay income tax on the amount withdrawn. On the other hand if you just want to withdraw the entire amount you would owe income tax on that amount over the principal investment. Basically any money that has come from interest is what you would owe income tax on. If you take all of the cash out of the policy the company will likely cancel that policy.
Strategy : Take Out A Loan
If youve built up a sizable cash value, you may also choose to take out a loan against your policy. Life insurance companies often offer these cash-value loans at interest rates lower than a traditional bank loan.
Of course, youre not obligated to pay back the loan since youre essentially borrowing your own money. However, its important to note that any money you borrow, plus interest, will be deducted from the death benefit when you die.
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Do You Pay Taxes On A Life Insurance Cash Out
Of all the things to consider before taking cash out of a life insurance policy, taxes must be near the top of the list. For an example of why, let’s go back to the scenario of the person who only purchased a policy because they owned a business and wanted to protect their partner’s interests if they died.
Let’s say this person paid $40,000 in premiums over the years, and ended up with $120,000 in cash value. They surrender the policy in return for the cash value in the account. As far as the IRS is concerned, $80,000 of that cash is taxable, because it represents how much the investment grew.
The smart move before withdrawing cash from a life insurance policy is to know how much of that cash must go toward paying taxes.
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Are There Penalties On A Life Insurance Payout
Generally, yes. Depending on how you choose to get your life insurance payout, you will likely be subject to some fees and may owe taxes. Each policy will be different, and its important to understand all the details before you take this step. In addition, if you pull out too much or can no longer make premium payments, you may lose your coverage completely.
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How Do You Access The Cash Value
You can withdraw money from your policys cash value account or take a loan against it and use the money for any reason.
You can also receive your cash value by terminating the policy. If you do so, the insurance company will return any cash youve accumulated minus surrender charges and fees.
How to Access Money in a Cash Value Life Insurance Policy
What Is Cash Value In Life Insurance
The cash value in your life insurance policy grows on a tax-deferred basis. That means you dont have to pay taxes on that growth while the cash value remains in your policy, but you might have to pay income tax if you withdraw the cash value.**
Heres a list of American Family Life Insurance Company policies that can gain cash value:
- DreamSecure Senior Whole Life Insurance
Can I Access The Full Amount Of My Policy
No. A policy that has a $50,000 life insurance benefit cannot be cashed in for $50,000. That amount can only be collected by your beneficiaries when you pass, provided you didnt access any cash value. The money you will be able to cash in will depend on how much cash value the policy has built, which is almost always considerably less than the total and can vary dramatically depending on how youve structured your life insurance policy.
What Happens When You Surrender Your Life Policy
Another important thing to note is when you surrender your life policy, you may get the cash you need when you need it, but youll no longer have the death benefit, which is the amount your beneficiaries would receive upon your death.
Trying to replace that death benefit later by getting coverage again could be more expensive down the road. And health changes could mean you wouldnt qualify for a new policy, so be sure to talk with your insurance agent about the consequences of surrendering your life insurance policy.
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How Does Cash Value Life Insurance Work
Some permanent life insurance policies offer two features:
- Death benefit, the amount that’s paid out to beneficiaries when the insured person passes away. This is often referred to as the “face value” of your policy, or the amount of life insurance coverage you purchased .
- Cash value, an additional feature that might make your policy more valuable, because you may be able to access the money while you’re still alive.1
With a cash value life insurance policy, a portion of each premium you pay goes toward insuring your life, while the other portion goes toward building up a cash value. The cash value portion of your policy accrues tax-deferred interest. How the money earns interest depends on the type of permanent life insurance policy you purchase.
Pros And Cons Of Borrowing Money From Life Insurance
|No credit or income check||It usually takes a life insurance policy many years to accrue a cash value, so you have to wait until this option is available for you|
|Can repay the life insurance loan when you can||Reduced death benefit if you dont repay the loan|
|Low-interest rates than personal or credit card loans||The accrued interest is taken out of your accumulated cash value|
|Can deduct the loans amount from the death benefit to repay the loan||If you still owe money when your policy ends, youll also owe tax on that money|
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Should You Cash Out Your Life Insurance
While the real purpose of life insurance is to provide death benefits to support your loved ones, that doesnt mean that you cannot reap the benefits of your policy while youre alive. The options mentioned above can allow you to cash in your life insurance policy if you need cash urgently. Cashing out your life insurance policy is a great way to access money when you need it, but the option you should use depends on how much money you need and whether you want to maintain coverage.
If you only need a small sum, withdraw money or take a small loan from your policy. If you need a much larger amount, see if you are eligible for living benefits or consider selling your policy through a life settlement.
Contact us or call us today at 694-0006 to get in touch with our team to discuss your options for cashing out your life insurance policy and find out how much you can get for your life insurance policy.
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.
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Variable Universal Life Insurance
With variable universal life insurance, part of your monthly premium will go into an investment account. The premium you pay is flexible meaning you can divert more money each month into this account if you choose. Keep in mind, however, that these policies usually have a cap and floor on the returns that you can receive.
Along with a death benefit, indexed universal life insurance policies allow you to put as much money as you choose into a fixed account or an equity-indexed investment account that can earn interest.
Consider These Things When Deciding To Get Cash Out Of Your Life Insurance Policy
As with any major financial transaction, researching the process on your own is just the first step. Its a great idea to consult a tax professional and/or financial planner when you are evaluating options.
Be aware of any advisors stake in the deal by understanding how they may benefit from your choice. The best guidance tends to come from knowledgeable, yet neutral professionals. Fees, commissions, and taxes will reduce the cash payout no matter which route you decide to go.
Financial problems can inspire people to contemplate selling, borrowing from, or surrendering their life insurance policies. Other options such as tapping into a 401 plan or taking out a home-equity loan may offer relief from money problems without losing the benefits of a life insurance policy.
Ovid is a life settlement exchange. We instantly match you with institutional buyers who are interested in your policy, based on you and your policy profile. Getting an offer for your policy from Ovid buyer partners is completely free. If you do want so sell your policy, Ovid has proven to help obtain average payouts above the industry average. Were based in San Francisco and have been featured in Forbes, US News, Business Insider for the incredible work we do for consumers. You can learn more about Ovid here.
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How To Withdrawal From A Life Insurance Policy
Generally, it is possible to withdraw limited amounts of cash from a life insurance policy. The amount available differs based on the type of policy you own and the company issuing it. The main advantage of cash-value withdrawals is they are not taxable up to your policy basis, as long as your policy is not classified as a modified endowment contract . A MEC is a term given to a life insurance policy in which the funding exceeds federal tax law limits.
However, cash-value withdrawals can have unexpected or unrealized consequences:
What Is Life Insurance With Cash Value
The textbook definition of life insurance with cash value is not limited to one type of life insurance. The cash value aspect can function in a variety of permanent plans, including whole, universal, variable, and indexed life insurance.
The two main components that make up a life insurance policy are the death benefit and the cash value. The death benefit is the part of the plan that the beneficiaries receive later on. You can predetermine what you would like this face value to be upfront. At some companies, the cash value of the life insurance policy grows separately in a tax-deferred account.2 Aflac utilizes a different route, so it depends on your preference.
The cash value portion of this life insurance plan can be particularly appealing because you may be able to access the money early. One can do this by taking out a loan against the policy, surrendering the policy, or making a withdrawal.3
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Higher Roi In Another Investment
The other argument to withdrawing money from the cash value of a life policy is the fact that there are other investment vehicles that tend to offer greater returns. Usually a universal life insurance policy will provide a 3-5% rate of return on the cash account. While there is no risk to this type of account because there is normally a guaranteed rate of return there are other investments that can return over 10 percent annually.
If you do plan to move the money to another investment be sure to know what surrender charges apply and how much income tax you will owe on the earnings. The policy is likely going to stop after the cash account is zero so be prepared to have other life insurance in place if needed.
Best Ways To Cash Out A Life Insurance Policy
- Leverage cash value withdrawals
- Use life insurance as loan collateral
- Surrender your life insurance policy
- Sell your life insurance policy
These alternatives apply to any type of permanent life insurance, whether you have a whole life insurance policy, universal life insurance or variable universal life policy.
The best choice for you will depend on your investment objectives and circumstances. In some cases, it may make more sense for you to borrow from your 401 plan or take out a home equity loan than to access the cash surrender value in your policy.
It is always wise to think twice when it comes to canceling any type of insurance coverage. But if you have a policy that you no longer need, then cashing it in or selling it may be the best option. Consult your financial advisor for more information.
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Ways To Capture The Cash Value In Life Insurance
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
If youve heard it once, youve heard it a million times: Life insurance is a must-have, especially when you have a family that depends on your income. If you die unexpectedly, a life insurance plan will ensure your familys financial needs are covered, from the monthly mortgage to grocery bills to your childs college education.
While income replacement is the primary purpose of life insurance, many policyholders tap into cash-value life insurance for other reasons, such as building a nest egg for retirement. Also known as permanent life insurance, cash-value life insurance policies provide both a death benefit and a cash-value accumulation during the policyholders lifetime.
With cash-value policies, policyholders can use the cash value in a variety of ways including:
- A tax-sheltered investment
- A means to pay policy premiums later in life
- A benefit they can pass on to their heirs
Whole life, variable life, and universal life all have a built-in cash value. Term life does not.
How To Withdraw Cash From Life Insurance
Withdrawing cash from a life insurance policy is one way in which those who are having financial difficulties can get the money they need. Perhaps you unexpectedly lost your job, want to invest in an investment property or suffered a decrease in your salary and want to use your policy money. Try to get the effective value of a life insurance policy to meet your cash flow needs and desires.
Get money by direct withdrawal from your life insurance policy. Keep in mind that if you decide to withdraw money from your life insurance policy, you may have to take responsibility for the payment of any tax that causes the part of your withdrawal that is greater than the payment of premiums during the term of the policy. For example, if you have $2,000 in cash value as part of your life insurance policy and the total premium payment is $1,000, you could withdraw $ 1,000 or less tax-free. However, if you choose to get more than $ 1,000, you would have to pay taxes for the amount you withdraw.
Get a loan against the life insurance policy. Acquiring a loan would mean not paying taxes at the time of withdrawal. Keep in mind that if there is any interruption in the coverage of the life insurance policy, you will need to raise the money to pay taxes on the portion of the cash value that is greater than the amount of the premium payment.
Think about consulting with a lawyer who is an expert in tax matters before withdrawing any money from your insurance.
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