3 Ways To Get Cash Out Of Your Life Insurance Policy

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If you have a universal life insurance policy or a whole life insurance policy that you’d like to trade in or tap for cash, you’re in luck. There are several viable ways to go about this, depending on whether you want to keep the policy, how much time you have available to spend on the project, and the amount of money you’d like to access.


Borrowing from the cash value of your life insurance policy

If you can’t get a conventional loan, aren’t ready to retire, are in good health, and want to keep your life insurance in force, borrowing from its cash value is a solid option.

People who choose this method of getting cash out of their life insurance policy like it because there’s no application process or credit check. This type of loan also won’t help (or hurt) your credit score because it doesn’t get reported to the credit reporting agencies. Interest rates on a loan from a life insurance policy are typically lower than average credit card and conventional personal loans. There’s no time-table for paying back the loan. Although if your policy lapses before it’s paid in full, you could be on the hook for income taxes on the amount you borrowed.

You can borrow up to the amount you’ve paid in premiums in most cases. This money comes to you tax-free. You’ll still have a death benefit (reduced by the amount of the loan) but it’s important to understand how interest payments work. Interest charges reduce the amount of the final death benefit. So, this isn’t the best options if you are counting on the full amount of the death benefit to support your family when you are gone, or if you aren’t planning to pay back the loan.

It is possible to lose a policy by taking out a loan on it. If the interest you accrue on the loan plus the amount of the loan exceeds the policy’s cash value, you’ll face tax consequences and the policy will lapse. If you can get a conventional loan, you should compare interest rates and terms to make sure you are getting the best deal and possibly spare the important death benefit. If you just need a band-aid to cover an unexpected bill or two, borrowing from the cash value of your life insurance policy may be the ideal option.


Want to know your policy value?

Use this Life Settlement Calculator to estimate your policy offer by answering a few questions.

Surrendering a life insurance policy for its cash value

If your whole life insurance or universal life insurance policy is a minimum of one to three years old and you are young with some reasonably priced alternate life insurance options, surrendering the policy for its cash value is a viable option.

When you surrender a life insurance policy there are no interest charges or repayment plans to deal with. Since the policy is cancelled upon surrender, your family won’t receive a benefit payment from the insurer when you die. The amount of cash available with a policy surrender is limited to the accumulated cash value minus surrender charges. Depending on the age of the policy, the surrender value may be less than the actual cash value, since surrendering the policy allows access to only the savings portion of the account.

Surrender fees vary, and are larger during the first few years that the policy is in force. Typically, any gain on the policy (surrender amount after fees minus policy premiums paid) is taxable as income. You’ll want to check with your accountant to be sure you understand your potential tax liability before making the decision to surrender your policy for cash.

In some states, life insurance companies are required to inform their policy holders that a life settlement is an option, since it frequently nets more money in exchange for the policy.


Want to know your policy value?

Use this Life Settlement Calculator to estimate your policy offer by answering a few questions.

Selling a life insurance policy to a third party while it is still in force through a life settlement

If you don’t need a death benefit, and want to get the most cash possible out of your universal or whole life insurance policy, selling it through a life settlement may be ideal.

While the amount of cash you’ll receive is less than the death benefit, it is also typically much more than the cash surrender value. Life settlements can be great for people facing retirement who no longer need a large death benefit to support a growing family, but want to add a lump sum to their finances so they can easily increase their standard of living going forward.

For example, a 74-year-old man paying $35,000 per year in premiums on a life insurance policy with a $2 million death benefit may not want to continue to pay the high premiums. He no longer needs the death benefit because his family isn’t financially dependent on him anymore. He could surrender his policy for its cash value of $250,000. The amount of a life settlement in this instance would be $505,000. Even after paying a broker’s fee and taxes on the gain, the life settlement offers a larger amount of cash in exchange for the policy.

The company that purchases your life insurance policy will continue to pay the premiums and then receive the death benefit when you die. The policy buyer may have a right to look at your medical records and they may even contact you in the future to check in on your health status (depending on your state’s regulation). Life settlements are taxable in part, and it’s best to consult your accountant throughout the process of selling your policy. You can find more information on how life settlements are taxed in IRS Revenue Ruling 2009-13.

The life settlement industry is well regulated, with more than 90% of the American population living in areas where state laws offer protection. You can find more information about your state’s laws regarding life settlements at the LISA (Life Insurance Settlement Association) website.

You can work with a broker that will represent you to companies that purchase life insurance policies or you can get quotes on your own. Either way, it’s important to understand the commissions and fees associated with the options, as they will reduce the net amount of money you’ll get from your policy. 



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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. It’s a great idea to consult a tax professional and/or financial planner when you are evaluating options.

Be aware of any advisor’s 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(K) plan or taking out a home-equity loan may offer relief from money problems without losing the benefits of a life insurance policy.



About Ovid

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. We’re 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.