Learn how to Cash in a Life Insurance Policy
When times get tough, people can end up trying to scrape up money for everyday expenses, and to continue to maintain the lifestyle to which they're accustomed. When this happens, you can actually tap into your cash-in life insurance policy in order to obtain funds. Of course, this isn't always the best course of action - if you're going to jeopardize your long-term financial security by doing so, then you should probably think again. But if there aren't any other options, then a cash-in life insurance policy can provide you with much-needed income.
Whole life and universal life insurance are called cash-value life insurance - this means that your deposits are held in a cash-accumulation account within your life insurance policy, and you can access those accumulations through policy loans, withdrawals, or surrendering all or part of the cash-in life insurance policy, or by selling the policy for cash.
Keep in mind that although you can get cash, the long-term consequences can be undesirable, depending on the method that you've used to access the cash.
You can usually withdraw cash from your life insurance policy. But how much, will depend on the cash-in life insurance company that issued the policy, and the type of policy that you hold. The advantage of a withdrawal in cash-value life insurance is that the money you take out isn't taxable.
However, withdrawals in cash-value life insurance aren't without the downside. Withdrawing can reduce your death benefit, and your premiums could end up increasing in order to make up the difference.
You can surrender, or cancel your cash-value life insurance policy, and use the cash in any manner that suits you. However, if you do this, you'll likely have to pay a surrender fee, and this will reduce the cash- value life insurance. Charges could vary quite a bit depending on how long you've held the life insurance policy. Also, the gain on the policy will be subject to income tax. Additionally, surrendering the cash- in life insurance policy will definitely get you cash, but it means that you're giving up the death benefit. And if you want to purchase cash-in life insurance later, it could be more expensive.
You can sell your life insurance policy to a settlement company or an individual in exchange for cash. The new owner makes the payment to keep the cash-in life insurance policy in effect, and when you die, they receive the death benefits.
When you sell your policy, you also need to keep in mind that the new cash-in life insurance policy holder will be able to see your medical records, and they have the right to request updates on the current state of your health. The life settlement issue isn't all that regulated, so it can be hard to determine if you're actually getting a good price for your cash-value life insurance policy. Further, as much as 30% of your benefit could go to fees and commissions, so before you surrender your policy under these conditions, think carefully.
The Final Word
When times are tough, it's natural to think about liquidating assets in order to raise cash. Maybe you don't really have any other choice. But when it comes to your life insurance, think about why you bought it in the first place, and ask yourself if you should keep the cash-value life insurance coverage - do you have people who are depending on your life insurance if something happens to you?
Before you cash in your life insurance policy, consider other options. Perhaps you could borrow against your 401 (k) plan, or take out a loan against your home's equity. None of these solutions are perfect, but they may be better options than cashing in your life insurance policy. Think carefully before you do something that you can't easily undo.