How To Cash In a Life Insurance Policy Before Death

Did you know that you can cash out a life insurance policy before you die?

While most people do not realize this, there are four ways to cash out life insurance while alive:

  1. Life settlements
  2. Policy loans
  3. Surrendering your policy
  4. Life settlements

In most cases, however, cashing out a life insurance policy will not make financial sense.  The amount your beneficiaries will receive if you keep the policy in force (active) until its maturity is always greater than what you can get if you cash out a life insurance policy while living.

Choose kindness.

You never know what battles people may be fighting.

How Do I Find The Cash Value Of My Life Insurance Policy

To make an informed decision on cashing in your policy, it’s important to read open care life insurance reviews to understand how others have managed their end-of-life expenses and the flexibility offered by certain policies.

If you have a permanent life insurance policy, you will accumulate cash over your lifetime in a savings account within your policy called a cash value account.

Contacting Your Life Insurance Company

The best way to determine the amount of money in your policy is to contact your insurer. They can provide you with the exact cash value of your policy.  Make sure to have your policy number and ID ready, as this will help them quickly and accurately identify your policy.

Online Calculators

Alternatively, you can use a cash value calculator to estimate the value of your policy. These can be found online and are generally easy to use. However, please be aware that these results may not be as accurate as those provided by your provider.

Check Out: State-Regulated Life Insurance Program Overview

Can You Cash Out A Term Life Insurance Policy?

In most cases, you cannot cash out your life insurance policy if you have term insurance.

Term life insurance is known as “pure life insurance” because it doesn’t have a savings or investment component, as a whole life insurance policy does.

Some term life policies offer riders that allow policyholders to convert their term life policy to a whole life policy. If you have one of these riders, you will begin to accrue cash value after you convert, but this is not an immediate way to generate cash from your policy.

Check Out: Does Smoking Invalidate a Life Insurance Policy?

Choose kindness.

You never know what battles people may be fighting.

Which Life Insurance Policy Can You Cash Out?

Many life insurance policies, including whole and variable life insurance, have a savings component associated with them after they have been in force for a period of time. These policies build “cash value”.  In other words, they accumulate cash from your premium payments that you can use for certain purposes.

Depending on your policy, you may access your policy’s cash value through a loan or a withdrawal.

A policy loan against the policy cash value is essentially a loan from the insurance company to you and does not require you to qualify for the loan based on your credit rating. A withdrawal is cashing out a portion of the policy. However, this will usually decrease the death benefit associated with the policy.

It’s important to note that different life insurance policies have different rules and limitations regarding when and how you access cash value, so be sure to check with your insurer or financial advisor to understand the details of your particular policy.

When Can I Cash Out A Life Insurance Policy?

If you have permanent insurance, you can definitely cash out life insurance while you are still alive. Generally, you must surrender your policy to your insurance company, which will send you a check for the accumulated cash.

The cash value is the portion of your policy where a portion of each premium payment is set aside and invested. Your policy will also accumulate dividends. The cash value normally accumulates more slowly than other investment vehicles, but for many people, the decreased risk justifies the slower accumulation.

The amount you can expect to receive from cashing out a whole life insurance policy depends on the type of policy you have and the length of time you have had it. Generally, the longer you have had the policy, the larger the cash value will be. Your insurance company will be able to tell you what your policy’s cash value is.

How To Cash Out Your Life Insurance While Living

There are two main ways to get cash from an existing life insurance policy: surrendering your policy or selling it.

Method #1 For Cashing Out A Life Insurance Policy (Life Settlement)

If you want to get the most money from your policy, you should explore life settlements.

A life settlement involves selling your policy for cash to an investor. This option is often beneficial for policyholders who don’t have a current need for their life insurance policy or want to raise capital from the policy.

Life settlement providers are financial intermediaries that specialize in negotiating life settlements. To get a good estimate of the value of your policy, you’ll need to provide the provider with personal and policy information. The provider will then work with potential investors to determine the best possible payout for your policy.

Once an offer is accepted, you will receive a lump sum payment in exchange for giving up ownership of the policy.

Method #2 To Cash Out A Life Insurance Policy (Policy Loans)

The simplest way to cash out a life insurance policy is to withdraw money from your cash value (a savings account that sits within all permanent life insurance policies).  This type of withdrawal is known as a policy loan.

A policy loan is designed to be a quick means to access money for lifestyle demands or a personal financial crisis without surrendering the entire policy, which would result in the policy being terminated.

While you do not have to pay taxes on the loan amount, you will, of course, have to pay interest.  If your policy loan has not been repaid at the time of your death, the outstanding loan amount will be taken out from the death benefits of your life insurance policy.

Method #3 To Cash Out A Life Insurance Policy (Surrender)

Another option for cashing out a life insurance policy is to surrender the policy and receive the cash surrender value in a lump sum.

To do this, you must first contact the company that issued the policy and ask what your accumulated cash value is and whether any fees are associated with surrendering (known as surrender charges).

While surrendering the policy allows you to receive your policy’s cash value, you will owe income tax on the funds you receive from this method.  It’s also important to note that many policies have a set window during which you can surrender your policy, so make sure to ask your insurance company about this as well.

Method #4 To Cash Out A Life Insurance Policy (Living Benefits)

One underrated way to cash out a life insurance policy while living is to use your policy’s Accelerated Benefits Rider.  (This may also be called a Living Benefits Rider).

These riders allow you to withdraw up to 100% of your policy’s death benefit if you are diagnosed with a terminal illness that gives you a life expectancy of fewer than 12 months.

With this method, you will not have to pay taxes in any form.

Choose kindness.

You never know what battles people may be fighting.

Can You Withdraw From Variable Life Insurance?

Yes, it is possible to withdraw from variable universal life insurance.

If you have a variable life insurance policy, you will usually be able to access the cash value of the policy. This cash value is created by part of your premium that is permanently placed in an account held by the insurance company.

This account can generally be accessed anytime you like, so you can withdraw from the account and use the funds as you, please.

Remember that withdrawing money from your variable life insurance policy will decrease the death benefits available to your beneficiaries, so withdraw money only in an emergency.

Also, if the money within your variable life insurance policy has been invested, make sure to consider the effect the withdrawal will have on your taxes.

What Happens If I Cash Out My Life Insurance Policy?

Cashing out a permanent policy means the policyholder receives the cash surrender value of the policy from their life insurance companies.

The amount of money received will be the cash surrender value of the policy, less any surrender charges or outstanding loans against the policy.

Different life insurance policies, like traditional and variable life insurance, have different cash surrender values.

Finally, remember that cashing out your policy will result in the policy being terminated.  This means you will no longer have a policy anymore, and your beneficiary will not receive your policy’s death benefit amount.

In addition, the cash surrender value is typically much lower than the amount of money invested in the policy when initially purchased, meaning that cashing out a whole life insurance policy is not typically a good financial decision.

The Tax Consequences Of Cashing In A Life Insurance Policy

The tax consequences of cashing out life insurance depend on the type of policy and whether or not it was cashed in during the policyholder’s lifetime.

Income Tax

Generally speaking, if cashing out your life insurance policy while living, the money will be subject to income tax. The exception to this is if you take out a loan on all the cash value in y our policy; however, you will face a high interest rate when taking money out through this method, so be sure to weigh the pros and cons.
On the other hand, if the policy is cashed in after the policyholder’s death, the money typically will not be taxed.

Tax Consequences of Accrued Interest

It is important to note that any accrued interest from the policy will still be subject to taxation when cashed in during the policyholder’s lifetime, regardless of the type of policy.
Also, if the policyholder cashes in the policy for more than the original policy premiums, some money may be subject to taxation.

Conclusion

During tough economic times, cashing in your life insurance policy to meet immediate expenses can be tempting, but drawbacks exist.

Withdrawals or policy loans may reduce your policy’s death benefit, cause you to pay taxes, or increase your premiums while surrendering the policy means giving up the death benefit altogether.

A life settlement, selling your policy for cash, is likely the best alternative, but make sure to consider other options, such as borrowing from your retirement account or home equity loan, before accessing your life insurance policy.