Cashing in Your Life Insurance

When times get tough, it can be difficult to make ends meet. And if you’re struggling to find sufficient money to pay for your everyday expenses, you might be thinking of cashing in your life insurance policy. Here’s what you need to know before surrendering your life insurance policy altogether.

Permanent life insurance policies build cash value over time.
You can access the money through a loan, a life settlement, or a withdrawal or by surrendering your policy.

What types of life insurance offer cash value?

Term life insurance policies don’t offer a cash-value benefit. All they do is pay a death benefit to your beneficiary if you pass away during the policy’s term.

In contrast, permanent life insurance policies such as whole life, universal life, and variable life insurance policies all have a cash value that increases over time—tax deferred. These types of insurance policies dedicate a part of your monthly premiums to building a cash account.

How can you access cash from your permanent life insurance policy?

Once your cash account has accumulated sufficient value, you can access the funds in a number of ways, according to Investopedia: with a loan, a life settlement, or with a withdrawal—or by surrendering your policy altogether. Let’s take a closer look at each of these options.

Loan: Your insurance company might allow you to borrow money with your cash account as a collateral. This has the advantage that you don’t have to qualify for the loan, because the amount you can borrow depends on the terms of your policy and the cash value. However, it’s important to know that unless you pay back the loan—with interest—your beneficiary will receive a reduced death benefit.
Life settlement: With a life settlement, you sell your policy for cash to a company or an individual who then keeps paying the premiums and receives the death benefit when you pass away. To qualify for a life settlement, you generally have to be at least 65 with a life expectancy of less than 15 years and a death benefit of $100,000 or more. Note, however, that you usually have to pay around 30 percent in fees and commissions—plus, the sum you receive may be taxed as income.
Withdrawal: Most insurers allow you to withdraw limited amounts of cash from your permanent life insurance policy. Keep in mind that the amount you withdraw may be taxed—and it might reduce the amount of your death benefit.
Surrendering your policy: This occurs when you give up your policy altogether to access the money in your cash account. You’ll be expected to pay surrender fees, and the gain on the policy will be taxed as income. Furthermore, you won’t have a death benefit anymore, which can leave your beneficiaries in a challenging situation.

Speak to a trusted life insurance adviser

If you’re strapped for cash and you’re thinking of using your life insurance policy to access money, speak with a trusted life insurance adviser first. They’ll be able to listen to your situation and inform you as to what’s the best option for your situation.