Life insurance policies offer essential financial security to loved ones after you die, yet most payments made go towards fees and charges; only some end up in your cash value account which grows according to investment returns.
There are various strategies for accessing the cash value in your policy, each offering their own set of advantages and disadvantages. Before making a decision, carefully consider your beneficiaries’ needs as well as consult a financial professional for advice before settling on one option or the other.
Policy loans
Policy loans provide you with a means of borrowing against the cash value in your life insurance policy as collateral, without impacting your credit report and typically at rates that don’t exceed premium payments. Since policy loans come directly from life insurers instead of you personally, they do come with some risks; specifically if the loan amount plus accrued interest remains outstanding upon your death then that will come directly out of their death benefit and reduce what your beneficiaries receive as their inheritance.
An insurance loan is an effective solution if you find yourself facing an unexpected financial emergency and in need of fast cash. Unlike borrowing from banks or credit cards, no repayment schedule is mandated and cash is made immediately available for any use. Furthermore, the terms can often be customized; you could make one-time lump sum payments or monthly installments — or combine both options!
When taking out a policy loan, make sure your repayment schedule can accommodate. Avoid stopping payments entirely and keep up with interest charges; failing to do so could cause your policy to lapse and therefore reduce beneficiary payouts.
Access your policy’s current cash value by accessing its website or app, or speaking with an agent. When inquiring further, ask about specific loan terms from insurer, such as minimum cash values and loan amounts as well as repayment requirements.
An emergency fund is an effective way of dealing with unexpected expenses without incurring policy loans; by setting aside money in it now you’ll be ready when something arises that requires urgent attention. Aiming for three to six months’ living expenses should give enough emergency fund money for use when needed.
Direct withdrawals
Many whole life policies allow their policy holders to access some of their cash value while alive, which may or may not be beneficial depending on your finances, length of policy ownership and implications for beneficiaries upon death. Carefully consider each factor when making this decision before considering other solutions as potential financial solutions.
Direct withdrawals can be used to cover various expenses. Unfortunately, however, they also come with some drawbacks: They reduce your death benefit and may be taxed. Furthermore, surrender charges could affect premium payments; furthermore a penalty might apply if taking them before age 59 1/2.
Another method is borrowing against your policy’s cash value, although this method may not be tax-free as a direct withdrawal is. Still, borrowing enough to cover premium payments could keep coverage intact and ensure timely access to funds without additional expenses or charges associated with direct withdrawal.
Use of your life insurance’s cash value can save you from incurring higher withdrawal costs, but borrowing large sums and accruing interest that exceeds your cash balance could leave you subject to a hefty tax bill at death or cancellation of the loan agreement.
Use your life insurance as collateral for a personal loan or line of credit; these options generally offer lower fees and interest rates than direct withdrawal. When considering all possible solutions to access a substantial sum of cash quickly, however, carefully weigh both options to make an informed decision.
Before cashing out life insurance policies, it is wise to consult a financial professional and discuss other alternatives such as reducing their death benefit or borrowing from outside sources (or selling your policy to third-parties for life settlement), as they could better meet your needs while helping ensure financial security in times of need.
Surrendering
If you own a permanent life insurance policy with cash value, a surrender may allow you to gain access to some of that money through surrender. Before using this option, however, it is important to fully comprehend its implications, both tax related and return-related. For any decision on this front it would be prudent to first consult an experienced financial professional so they can assess your needs and goals before cashing out life insurance policies.
Calculating cash surrender value requires reviewing your life insurance contract, which should provide information about death benefit, premium payments and accumulated cash – the latter of which can be generated from premium payments as well as earnings on invested funds. Building cash surrender values takes time; as your policy matures and collects interest earned on its investments over time, more cash surrender value will accumulate; it can either be paid out lump sum or over periodic payments and depending on your policy may require fees in order to withdraw or cancel it.
Resigning a life insurance policy involves cancelling coverage in exchange for a lump sum of the cash value accumulated over time. It can be an effective strategy to save taxes or pay off debts such as student loans faster. Usually, cash surrender value is less than total premium payments into policy; additionally if more than your cost basis of policy is received as compensation from surrendering it may incur income taxes on its amount received.
Life settlements offer you an additional way of profiting from life insurance beyond its cash surrender value. You can sell all or a portion of your policy to a company specializing in life settlements; together they will negotiate an agreed upon price before concluding the sale process with medical records and possibly filling out a questionnaire as required.
Some policies allow you to use your cash value to help pay premiums, which can lower costs while keeping coverage intact. But be careful–draining too much from it could lapse your policy altogether, so speak with your agent or financial advisor regarding withdrawal, loan and premium payment arrangements specific for your life insurance policy.
Selling
If you no longer require life insurance or can no longer afford its premiums, selling it may be an option. Your buyers will keep the policy and receive its death benefit; while sellers will also receive a payout based on its cash value. While selling may work for some individuals, it should be remembered that selling has significant financial and legal ramifications that could interfere with long-term goals.
To sell life insurance, contact a broker or settlement company offering this service. These businesses can help you locate a buyer and negotiate its price; typically they charge up to 30% of its sale price as their fee; before making any decisions be sure to consult both your insurance agent and accountant first.
Along with fees and commissions, any proceeds you gain from selling your policy could also be taxed as income or capital gain – this may affect eligibility for public assistance programs; state taxes may also apply on this sale.
Selling life insurance depends on its face value, your estimated longevity and premium payments made over its term. Your proceeds may exceed its surrender value but fall short of providing your beneficiaries with any benefit when you die.
Liquidating life insurance may seem appealing for various reasons, but it’s essential that you carefully consider its effect on both you and your loved ones before making this decision. Adjusting, converting or replacing may make more sense as your heirs will still benefit from having coverage; plus you could find ways of meeting immediate cash needs such as borrowing against your 401(k) or taking out a home equity loan.