If you have some difficulties at any time during your life, you may wonder if you can cash in a life insurance policy. After all, you might have heard your insurance broker telling you that the life insurance policy is an asset. But can you liquidate this asset?
Whether you can cash in on a life insurance policy depends on the type of policy you carry. When you buy life insurance, you pay your premiums, ensuring a death benefit for your beneficiaries. Essentially, you are passing the risk to the insurance company in exchange for the premium you pay. But that is not the case for all insurance policies.
You need to be familiar with the type of coverage you have purchased. If you have purchased a term life insurance policy, in which the insurance provider promises to pay the death benefit to your beneficiary in case of your death within the time period of the policy, for example, 20 years, then there are no additional values in the policy, and hence you can not take any cash out of the policy.
On the other hand, both whole life and universal life insurance policies have cash value in addition to the insurance protection component. While whole life and universal life are designed slightly differently in their cash value setup, the core concept is the same: they enable the policy owners to grow a cash account tax differed.
What type of life insurance policy allows me to cash out?
Term life and permanent are the two main types of life insurance. You buy the coverage to protect your beneficiaries from uncertainty should you die during the policy term. Term choice is anything from 10 to 30 years. Term life policies don’t carry any cash value.
On the other hand, the various types of permanent life policies like universal life, variable universal life, and whole life will allow you to withdraw from their cash value.
How can you cash out?
There are several ways to draw money from a life insurance policy with a cash value. Besides removing money from the policy, you can also surrender the policy, borrow against it, or pay your premiums with it.
Let’s look at the implications of each:
Withdrawing Money From Your Life Insurance
You can withdraw money from your life insurance policy with cash value. The money is tax-free unless your withdrawal surpasses the amount of the built-up cash value of your policy. Generally, the amount paid in premiums is tax-free, whereas anything exceeding that is taxable.
If you withdraw some money, your policy remains intact, but if you remove it all, it cancels the policy. So in some circumstances (paying for tuition, covering health expenses, making a down payment for a house), it makes common sense to withdraw from the policy, but remember it will erode the benefits to your beneficiaries, and you may need to pay some tax.
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Surrendering Your Life Insurance
When you surrender a policy, you withdraw its total cash value (money paid towards it plus interest accrued), which essentially cancels the coverage. If you have unpaid loans or premiums, these get deducted from the current worth of the policy, and you sometimes pay surrender fees and income taxes.
It is not worthwhile to surrender the whole value of your life insurance before a minimum of ten years because the cash value won’t be worth much. You will receive the payment after 14 to 60 days and expect to pay fees for withdrawals and loans from the total amount.
Get the opinion of an expert advisor from AplusWealth to protect your family’s financial future and find the best solution when you need extra cash. A monetary counsellor or insurance agent is the best person to evaluate your financial needs, assess your current life insurance policy’s cash value, and find a solution before surrendering your whole life insurance policy.
Borrowing Against Your Life Insurance
Loans on the cash value of a life insurance policy are possible for various needs without needing a credit check. However, the unpaid balance, interest, and fees come off the death benefit if you die before it’s paid. Therefore, you must weigh your long-term goals and current needs to see if it’s worthwhile because you will pay interest.
Remember, even though you don’t have to pay back your life insurance loan, the interest keeps accumulating until it’s paid off or you die.
Paying Policy Premiums With Your Cash Value
Sometimes you can rely on your policy’s cash value to pay off your premiums during leaner months. However, if you drain the cash value of your life insurance like this, the policy could lapse and your coverage with it.
Tax Liabilities of Cashing Out Your Life Insurance
You have no tax liability when you get paid out an amount that equals the premiums paid since it is a return of premiums. However, when you withdraw an amount from the policy gains, it is taxed like a regular income.
In Conclusion
When you need to liquidate assets to pay for something else, your life insurance coverage should be the final option since you have bought it for a specific purpose. However, if you still have dependents, you should explore the possibilities, like borrowing from your retirement account or getting a home equity loan before surrendering your life insurance.
Permanent life insurance is coverage that lasts for the entire duration of the insured’s life span. There are three main types of permanent life insurance: Term 100, Whole Life, and Universal Life. The first option provides a tax-free death benefit to the beneficiary, much like the term life insurance products, while the latter enables the insured to have both death benefit and cash value within the policy. The cash value grows on a tax-deferred basis and can be invested in different options such as bonds and mutual funds. Tax is only paid when the money is withdrawn, and this deferment allows the cash to grow. These policies last indefinitely and are used for estate planning.
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Choosing a life insurance company is simple yet crucial. Once you have decided to get life insurance, your first steps are to decide on the amount of your coverage and the term of the policy. From there on, you need to compare quotes, and once you receive them, you may be overwhelmed with the list of Insurance company choices. Read more!
Finding the right Life insurance policy with the proper coverage amount at the right price is complicated and overwhelming. Our expert advisers are fully qualified to help you work out the coverage that will meet your family’s needs by considering your age, health, liabilities, and goals. At Apluswealth, you can get a quote, compare quotes and find the life insurance quote you feel comfortable with. Our life insurance advisors will provide quotations and the most suitable policy types.
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