There are three types of life insurance that have a built-in cash value. All three types are forms of permanent life insurance that also have a tax-free death benefit component. This type of life insurance stays in effect if the policy owner pays the premiums. A changing health status or age doesn’t affect a permanent life insurance policy once it’s in force.
All types of permanent life insurance policies are eligible for a life settlement if the insured person is over the age of 65 and the face value of the policy is greater than $100,000.
Term life insurance does not have a cash value. This is the most inexpensive type of life insurance and it only pays named beneficiaries upon the death of the insured person. In some cases, a term policy can be converted to a permanent policy.
Universal life insurance
This versatile type of life insurance lets the policy owner shift the premium amounts over time according to their financial goals and changing needs.
The policy owner must pay the minimum cost of the insurance for the policy to remain in force. If the savings portion of the policy isn’t performing well, the policy owner may choose to use that money to cover the cost of the premiums.
The insurance company bases the interest rate paid on the savings portion of the policy on current interest rates. If their portfolio makes more money than the minimum interest rate, the extra money is added to the cash value of the policy.
Whole life insurance
This type of life insurance provides a predetermined death benefit to the beneficiaries of the policy when the insured person dies. It has a tax-deferred savings component that can provide cash in retirement. The policy owner can also borrow from the fund or withdraw money as needed.
With whole life insurance, the insurance company provides a guaranteed interest rate of return on the cash value for the life of the policy. Any outstanding loans on the cash value of the policy are subtracted from the death benefit paid to beneficiaries.
Variable life insurance
The policy owner can choose to shift the amount of money they pay in premiums with variable life insurance policies. There are no guarantees about a minimum rate of return on this type of life insurance policy’s investment portion. If the policyholder needs to reduce their premium amount for a period of time, they can do so without sacrificing a portion of the death benefit by using the cash value of the policy to make up the difference.
Policy owners can access the cash value of variable life insurance by taking out a tax-free loan against the accumulated cash value. When you buy this kind of life insurance, you are investing in subaccounts similar to mutual funds. The cash value of the policy depends entirely on how the investment portion of the policy performs over time. It is possible for the cash value and death benefit to decline if the subaccounts perform poorly.
You can lose the cash value in your permanent life insurance policy
Many policyholders don’t understand that when they die, the predetermined death benefit goes to their beneficiary, and the cash value accumulated in the policy goes to the insurance company.
Instead of letting the cash value of the policy that exceeds the death benefit disappear, consider using it to pay costly premiums. People who want to keep the death benefit intact for the benefit of their heirs and who don’t mind paying the premiums should consider using the cash value to increase the death benefit. Many life insurance policies will agree to let policyholders trade cash value for a higher death benefit when asked.
Making a withdrawal from the policy is an option. It’s important to understand how that action impacts the death benefit. In some cases, it could reduce the death benefit dollar-for-dollar. Consult the insurance company to find out the specifics of your policy.
The accumulated cash in a permanent life insurance policy is an often-overlooked financial asset. Policyholders approaching retirement should take extra care when considering their options for accessing the cash in their policy.
How to determine how much cash you can get out of your life insurance policy if you don’t need the death benefit
People who no longer need the death benefit portion of their permanent life insurance policy can relieve themselves of the burden of paying premiums by surrendering the policy back to the life insurance company in exchange for the surrender value, which is an amount usually smaller than the cash value. In many cases, policyholders over the age of 65 have the option to sell the policy to a group of investors through a life settlement.
The insurance company can keep some of the cash value of a policy in the form of a surrender charge if the policyholder decides to surrender the policy in exchange for the available cash. The terms depend on the insurance company, the type of policy, and the value of the policy.
The net surrender cash value of a permanent life insurance policy is the amount you’ll keep if you surrender the policy and forfeit the death benefit. You can find this number on your most recent statement from the insurance company, or you can call your insurance agent to get an up-to-date estimate.
To get the most cash out of your life insurance policy, consider a life settlement
A life settlement can provide much-needed cash to people over the age of 65 who own a permanent life insurance policy with a face value of over $100,000. The amount of a life settlement depends on the remaining amount of premiums that must be paid between selling the policy and the death benefit payment, the investor rate of return, and the expected lifespan of the insured person.
This well-regulated industry offers a great way to pad a retirement nest egg, pay for the rising costs of healthcare in retirement, or upgrade day-to-day life. Getting an estimate of how much your life insurance policy may be worth in a life settlement takes just a few minutes.