How Do I Cash In A Life Insurance Policy?
You may find yourself facing more money constraints than you imagined right now. This may be due to paying life insurance monthly premiums, but did you know you can cash out your life insurance policy before death? That’s right, it is an option for policyholders, but keep reading to see if it makes sense for your specific circumstances right now! Today, Arlington Greene will share more about what cashing out your life insurance policy means. Also a few benefits to doing so.
What Does It Mean To Cash Out A Life Insurance Policy?
This is a way for policyholders to access the accumulated cash value from their policy, even before their death. Typically, policyholders pay premiums in order to have coverage for benefits upon death, while some policies also have benefits to help you while you are alive to help fund things like retirement. The policies may allow the policyholder to access some of the money while they are alive by ways of surrendering it, selling the policy, or loans.
Where Does The Cash Value Come From?
That’s a great question! You have the ability to build cash value by having a cash-value life insurance policy. This premium may be more expensive than a “term life” insurance premium since it is long-term coverage. With a cash-value life insurance policy, a portion of each premium the policyholder pays goes toward insuring your life, the other portion goes toward building up a cash value. The cash value portion does accrue tax-deferred interest, based on the type of permanent life insurance policy the holder purchases.
So now that we have a foundational understanding of cashing out your insurance policy, let’s consider if this is the right step for you and your family. This decision will mostly depend on whether you want your coverage to maintain and how much accessible money you have. One example of a high-cost expense would be like a minor medical problem or a new car. If you are looking to get money from your account the easiest way would be to take a loan against your cash value. This will allow you to retain life insurance coverage. If you are, however, needing a larger sum of money, surrendering the policy might be a better option for you.
Please be aware that depending on your life insurance policy, you may or may not be subject to early withdrawal fees that affect your overall benefits. This is why it is extremely important to think on this decision and speak with experts before making a decision that will financially affect your future.
If a policyholder decides to take cash out of a life insurance policy by way of a loan and pays it back entirely, their beneficiaries will receive the full death benefit upon the policyholder’s death. If they die while there is a balance owed, that amount (plus interest) is subtracted from the death benefit paid to beneficiaries. So if you are worried about your beneficiaries and considering taking out cash out of your life insurance policy, they will still receive benefits. However, the big difference arises when you completely surrender your life insurance policy while you are still alive. In return for withdrawing the entirety of the cash value, they must then surrender the policy to the insurance company. That means that they no longer have life insurance coverage. There would be no death benefit that will be paid out to beneficiaries upon their death.
There is also a charge called the “surrender charge.” The policyholder will also owe taxes on the amount cashed out, which could amount to a large amount of money depending on how long you have held the life insurance policy. The surrender fee often starts at 10% if you cash in your investment in year one. However, this amount decreases to 1% if you cash it in during year nine, with no surrender fees in year 10 or longer.
What Are Other Scenarios That Policyholders May Surrender Their Policy?
If the policyholder has a terminal illness, policyholders are expected to live fewer than 12 months (a year) to cash in a life insurance policy to pay for everything as far as living expenses and healthcare.
If the policyholder is in need of long-term healthcare coverage, they can also cash out their life insurance policy to help cover the costs for the care that they need.
When the policyholder has a chronic illness that prevents them from certain hygienic activities like bathing or daily routines of eating meals and getting dressed, they can potentially cash out their life insurance policy to help pay for the cost of care.
Give Us A Call Today!
Do you still want to know more about life insurance policies and potentially cashing out yours? We can help you through the steps you need to consider with this decision! Give us a call today!