Life insurance cashing

Yes, it is possible to take out life insurance, but only with a permanent life insurance policy. To understand which policies allow a person to cash out a life insurance policy, it helps to understand the difference between two main types of life insurance:

  • Lifetime : A term life insurance policy is designed to cover a person for a specified period of time. Most often, the coverage lasts 10, 15 or 20 years. Once the term expires, the policyholder stops paying premiums and the policy expires. A policyholder who wishes to continue with life insurance coverage must extend the original policy or purchase new coverage.
  • Permanent life insurance: Permanent life insurance never expires. As long as the policyholder pays the premiums as agreed, the policy remains in force. And if the permanent policy is “whole life” or “universal life”, it can accumulate a cash value. Every time the policy owner makes a payment, the insurer takes a portion of that payment and puts it in a fund. As the fund grows, it earns interest.

There is no cash value associated with a term life insurance policy, but there may be with a permanent life insurance policy. If the insurance contract in question is a permanent contract that accumulates cash, it is possible to cash out a life insurance contract. If this sounds a bit confusing to you, stick with us. We will break it down further.

Keep in mind: It is not possible to withdraw the life insurance from the total amount of the death benefit. For example, if a person has a permanent life insurance policy with a death benefit of $ 200,000, they cannot cash out the full $ 200,000. Unless there are special circumstances (which we’ll cover later in this article), they can only cash out a life insurance policy for money accumulated over the years.

How to withdraw money from a life insurance policy

As we mentioned, if someone is hoping to cash in on a term life insurance policy, they are out of luck. However, with a permanent policy – like whole life insurance or universal life insurance – there may be money to draw on. Here are five ways to cash out a life insurance policy.

Withdraw from your policy

Depending on the amount of premiums paid by the insured, it may take years to build up enough cash to draw on. However, if someone has been paying for a few years and has a good reserve of cash, they can make a partial withdrawal from cash value life insurance. Suppose a person has $ 50,000 in cash accumulated in their account and needs $ 25,000. If they called their insurance company and asked them, “Can I take money out of my life insurance?” The answer would almost certainly be yes.

At this point, several things would happen:

  • The insurer would send the policyholder a check for $ 25,000.
  • The insurance policy would remain in force, meaning that beneficiaries would receive a death benefit if the policyholder died.
  • The amount received by beneficiaries would be $ 25,000 less than the face value (death benefit) of the policy. Thus, instead of $ 200,000, beneficiaries would receive $ 175,000.
  • According to the police, taxes may be due on the $ 25,000 withdrawn. Before cashing out any portion of a life insurance policy, it is important to ask a tax professional about the tax consequences.

Borrow from your policy

It may be possible to take out a loan from a life insurance policy. Generally, the policyholder does not have to pay taxes on the amount borrowed, but must pay interest, just as if borrowing the money from an outside lender.

A life insurance loan is not like a traditional bank loan. On the one hand, the policyholder does not have to repay the loan. The tricky point here is that they are responsible for paying interest whether or not they repay the borrowed amount. If they do not pay interest, these payments are taken from the cash value remaining in the policy. Once the cash value is used up, the insurance company may terminate the life insurance policy for non-payment.

If a policyholder withdraws money from a life insurance policy through a loan and pays it back in full, their beneficiaries will receive the full death benefit on the death of the policyholder. If they die with a balance owing, that amount (plus interest) is subtracted from the death benefit paid to beneficiaries.

Give up your policy

Let’s say a person has paid off a permanent life insurance policy for 30 years. They bought the policy because they owned a business and didn’t want to embarrass their business partner if they died. Now they’ve sold the business, have a lot of money in the bank, and don’t want to pay for a policy they don’t need. They decide to take the cash value of the insurance policy.

In exchange for withdrawing the entire cash value, they must surrender the policy to the insurance company. This means that they no longer have life insurance coverage and that no death benefit will be paid to beneficiaries upon their death. They may also have to pay a “redemption fee” and will almost certainly have to pay taxes on the amount cashed in.

Benefit from living benefits

Many permanent life insurance policies offer the option of withdrawal before death, if certain circumstances apply. For example:

  • Terminal illness: Allows an insured who is expected to live less than 12 months to cash in a life insurance policy to pay for everything from living expenses to health care.
  • Long term care: Policyholders facing the need for long-term health care can also purchase life insurance to help pay for the care they need.
  • Chronic disease: Let’s say a person can stay at home, but has an illness that prevents them from doing things like bathing, eating, or dressing. It is often possible to cash in a permanent life insurance policy to help pay for the cost of care.

If a policyholder is not sure whether a policy provides these “living benefits”, they should call the insurance company to find out. Even if a policy doesn’t cover the full cost of long-term care, it can certainly help.

Keep in mind: If the policyholder is otherwise eligible for Medicaid assistance, withhold collection of life insurance benefits until the policyholder (or their representative) has a clear Medicaid picture of the life insurance benefit. ‘impact this will have on the potential benefits.

Apply cash value to policy premiums

If an insured is struggling to pay their premiums, there may be a short-term solution. As long as the policyholder has contributed to the policy long enough to have accumulated cash, they can ask the insurer to use this accumulated cash to pay the premiums for the policy. Let’s say a person has lost their job, but wants to make sure that premiums are paid until they find a new job. Using the money they’ve accumulated to pay those premiums keeps the policy in force, so they have less to worry about.

Keep in mind: Once the cash value of the policy is exhausted, the policyholder will have to make payments again – otherwise, the insurer can cancel the life insurance policy.

Do you pay taxes on a life insurance withdrawal?

Of all the things to consider before taking money out of a life insurance policy, taxes should be at the top of the list. For an example of why, let’s return to the scenario of the person who bought a policy only because they owned a business and wanted to protect their partner’s interests in the event of death.

Let’s say this person paid $ 40,000 in premiums over the years and ended up with $ 120,000 in cash value. They give up the policy in exchange for the cash value in the account. As far as the IRS goes, $ 80,000 of this money is taxable because it represents the growth of the investment.

The smart thing to do before you take money out of a life insurance policy is how much of that money should be used to pay taxes.

When to cash in your life insurance contract?

Suppose an insured has amassed a small fortune and does not consider whether his beneficiaries will be taken care of after his death. It may be wise to surrender a policy and take the cash value at that time.

Another time a person may consider terminating their coverage is when their investment strategy has changed. Let’s say a person initially bought an indexed universal life insurance policy, because they liked it to be tied to a major stock market. Later, they decide that they prefer to use the money they put in the bonuses to make other types of investments. It is possible that cashing out their life insurance policy at this point makes financial sense.

Warning word: Selling a permanent life insurance policy to a third party is never recommended, no matter how quickly they promise money. These companies often prey on people who are desperate for money and are paying pennies on the dollar. In addition, once it has purchased a policy, the third party company receives the death benefit on the death of the policyholder, leaving the original beneficiaries aside.

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