What to Consider When Cashing in a Life insurance Policy

Depending on the type of life insurance policy you have, it may come with a cash value benefit. Cash value is the amount that would be funded to you in cash based on the worth of your policy. As you face hard times in life, you may be thinking of how you can scrape together some money. Depending on your policy, you may be able to claim your life insurance policy's cash value.

Withdrawals

Limited amounts of cash are available for withdrawal. The terms around the amount and at what point those finances are available to you depends on the policy you have. These funds are most likely not taxable as long as the value is up to your policy basis. Due to the nature of these transactions you may want to consider meeting with a tax professional for more information about taxes on cash value benefits.¹

Before taking out your cash value benefit, you may want to consider if accessing those funds will reduce the death benefit your beneficiary would receive should you pass. Your licensed insurance provider should be able to provide you with information that may help you weigh your options.

Loans

Some insurance companies and lenders may allow you to use your life insurance as collateral for a loan. Each policy is different and may impact the interest rate you are given. Generally, you aren’t obligated to financially qualify and the funds you receive most likely will not involve any taxes or payments besides interest.

While a loan may be helpful at the time, it may reduce the death benefit your beneficiaries receive at your passing and interest could still accrue on an unpaid loan.

There are many things to consider when taking out a loan against your life insurance policy. Speaking with a tax professional may help you make an informative and strategic decision.

Surrendering a policy

Surrendering a policy means you are choosing to cancel it. By doing so, you may use the cash you receive in the best way you see fit.

Some policies may require you to maintain the policy for a certain amount of time in order to wave any possible surrender fees. These fees may be paid by the cash value.

Canceling your policy should be heavily thought out as it would revoke the protection you purchased for your beneficiary. Please speak with a tax professional and a professional licensed insurance provider to better understand your options.

Life Settlement

Another option would be to sell your insurance policy to a company. There are companies that will buy your policy allowing you to leave with cash. This differs from surrendering your policy. Selling your policy means the new policyholder pays the premiums, gets the coverage, and receives the death benefit. Typically, these companies look for those that are above the age of 65 and have 10 to 15 years or less left on their life expectancy. Keep in mind, whatever gain you receive from selling your policy may lead to income taxation.

Before taking any actions, it's important to remember why you bought your life insurance policy in the first place - to protect the ones you love. Consider talking to insurance and finance professionals to help define all of your options.