People who own a permanent life insurance policy with an investment component and have paid premiums for more than 15 years have several options for getting cash out of their life insurance policy.
Term life insurance has a death benefit, only. It’s not possible to get cash out of this type of policy. You may be able to convert a term life insurance policy into a permanent policy, depending on the policy terms. The best way to learn about options for converting a policy is to contact your insurance company, directly.
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Getting cash out of a permanent life insurance policy
Cashing out a life insurance policy cancels the death benefit. On your most recent life insurance policy statement, you may see “available partial surrender value” and a dollar amount. This is the amount you can get if you cash in the life insurance policy.
If you don’t have a statement handy, simply call the insurance company and speak with one of their customer service representatives to find out how much you’ll get if you decide to cash in your policy.
In some cases, you may have to pay a surrender fee to the insurance company. This charge is a deterrent against the early withdrawal of money from the policy. It typically decreases as the insurance policy ages, but it’s important to find out if you’ll be charged a surrender fee and if so, the exact amount.
The investment portion of a life insurance policy may exceed the amount of premiums the policyholder has paid over the years. In this case, the amount of the cash value they get to keep may be reduced by taxes. Speak with a tax professional about your specific financial situation so you can fully understand how cashing in the policy will affect your tax bill.
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Cashing in life insurance eliminates death benefits
Before deciding whether to cash in a life insurance policy, carefully consider whether your beneficiary needs the death benefit. Many seniors with self-sufficient children find that the large permanent life insurance policy they initiated when their family was young is no longer necessary.
If you decide to cash in your life insurance policy and give up any rights to death benefits, it will have an impact on the financial future of your family. Purchasing permanent life insurance past a certain age or with health problems can be prohibitively expensive or even impossible, so weight the situation carefully before making a final decision.
If financial concerns like a large mortgage obligation or heavy debt load would make life difficult for surviving family members when the policyholder dies, consider other options besides cashing in life insurance.
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Borrowing from cash value of life insurance
Whole life insurance policies can serve as a financial resource, even if you aren’t ready to give up the death benefit by surrendering the policy for its cash value. Many whole life and universal life insurance policies include a loan provision that allows policyholders to borrow money for any reason from the life insurance company, using the cash value as collateral for the loan.
To find out how taking a loan out against your life insurance policy will impact the death benefit, ask your insurance agent for an in-force illustration. Ask about whether the loan provision includes an opportunity cost or any other fees besides interest.
The amount of money you borrow must be paid back or it will continue to accrue interest charges until your death, at which point the benefit paid to your heirs will be reduced by the outstanding debt.
If you only need a small amount of money and your other options are high-interest loans or credit cards, borrowing from the cash value of a life insurance policy may be a better choice.
Consult the insurance company to learn about interest rates and to create a plan to pay back the borrowed amount as quickly as possible. While any amount you borrow up to the total premiums you’ve paid is tax-free, it’s a good idea to check with a tax professional to make sure you don’t end up with an unexpected tax bill.
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Selling a permanent life insurance policy
As the costs of healthcare and long-term care rise, many seniors have concerns about how they can live comfortably with the amount of money they’ve saved combined with their social security benefits.
If the amount of money available in a scenario where you cash out your life insurance policy isn’t enough to cover the costs of long-term care and health care, a life settlement may be a better option.
People over the age of 65 who have an unwanted or unneeded life insurance policy with a face value of over $100,000 get more money in a life settlement than they would by cashing it out. A life settlement offers less money than the face value of the policy, but even after brokers fees, the policy owner is better off financially than if they had cashed out or surrendered their policy.
Because life settlements can be so much more financially lucrative for some seniors, certain states even have laws requiring insurance companies to advise policy owners of life settlement as an alternative to letting a policy lapse or surrendering it for its cash value.
In Georgia, H.B. 193 is the first state law that prevents life insurance companies from firing life insurance agents who tell consumers about the life settlement option. The Life Insurance Consumer Disclosure Act, passed in April of 2016, states that “…an insurer shall not terminate or otherwise penalize an agent for apprising a policy owner of alternatives to the lapse or surrender of an individual life insurance policy…”
Seniors who can no longer afford the high premiums associated with permanent life insurance may not be aware that a life settlement is a much more lucrative option than cashing in their life insurance policy.
According to the U.S. Government Accountability Office, policy owners who participate in a life settlement get an average of seven times more money than the policy’s surrender value.
Finding out how much money may be available in a life settlement takes just a few seconds. Click here to get an instant estimate.