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What to Know About Cashing Out Life Insurance

Last Updated: April 15, 2024
about cashing out life insurance

Paying life insurance monthly premiums may become a burden for policyholders who are facing money constraints. This feeling worsens with the realization that life insurance benefits can be availed only after the death of the policyholder. However, one fact that many policyholders don’t know is that they can cash out life insurance before death in order to use it’s value while they’re still alive.

In tough financial times, people are sometimes left scrambling for cash to meet their expenses and lifestyle demands. In situations like these, policyholders may consider cashing out their life insurance as a solution to a financial crisis. While cashing out your life insurance policy is a big decision that can have a significant influence on your financial life, at times it becomes a necessity.

In this guide, we’ll help you determine if you should cash out a life insurance policy and how to do it.

Key Takeaways

  • Cashing out a life insurance policy allows you to get money or benefits from the policy while you’re alive
  • There are three primary ways to cash out a life insurance policy, but seven options in total
  • Some options are only available if you meet the right requirements, so you’ll need to check your policy details to see what you can choose from
  • Each option has pros and cons, so you should carefully consider your needs and the needs of beneficiaries to decide what’s the best choice for your situation

What Is Cashing Out A Life Insurance Policy?

Cashing out a life insurance policy is the process by which policyholders can access accumulated cash value from their policies before their death. Normally life insurance works by policyholders paying premiums in exchange for coverage that provides a death benefit upon their passing, and some policies also have living benefits to help fund retirement. However, policies that accumulate cash value such as whole, variable, universal life insurance may allow the policyholder to access some of that money while they’re still alive through loans, withdrawals, surrendering it, or selling the policy.

Generally, any unused cash value for a life insurance policy goes back to the insurance company after the policyholder’s death. Some universal life insurance policies will add the cash value to the death benefit, but otherwise, you should not expect beneficiaries to receive extra money you’ve accumulated. As a result, it’s recommended to withdraw money, use it to pay premiums, or find ways to utilize the money while you’re alive so it doesn’t go to waste.

Cashing Out vs. Cashing In Life Insurance

When looking into cashing out life insurance you may also hear about cashing in, in some cases these terms are used interchangeably. There is no difference between cashing out and cashing in a life insurance policy, as the terms refer to the same process that allows policyholders to access cash value from their life insurance policies while they’re still alive.

Can You Cash Out A Life Insurance Policy While Alive?

You can cash out a life insurance policy, even while you’re alive as long as you have a permanent policy that accumulates cash value or a convertible term policy that can be turned into a policy that accumulates cash value. 

There are several options for cashing out a life insurance policy while you’re still alive including:

  • Withdrawing money from the cash value account (like a savings account)
  • Taking a loan against the policy’s cash value
  • Surrendering the policy to the insurance company
  • Selling it through a life settlement

The option that’s best for you will largely depend on whether you want to maintain coverage and how much money you want to access. For example, if you just need a small amount of cash for a recent expense like a minor medical expense or a new car — withdrawing from the account or taking a loan against the cash value will be the easiest options that allow you to retain coverage. However, if you’re looking for a larger sum or want to end coverage — surrendering or selling the policy will be better options. If you’re unsure which option to pursue, speak with a financial advisor for more information.

Can You Cash Out A Term Life Insurance Policy While Alive?

Term life insurance can’t be cashed out because these policies do not accumulate cash value during the limited time they provide coverage. However, some term policies have an option that enables the policyholder to convert them into a form of permanent life insurance. In some cases these types of policies are called convertible term life insurance, in other cases this option is available in the form of an optional rider for an added cost.

If you have a term life insurance policy and are wondering if it can be cashed out, you should review your policy documents or talk to your insurer to see if it can be converted.

How to Cash out a Life Insurance Policy While Alive

There are three ways that you can use your life insurance policy while you’re still alive:

  1. Tap into the cash value through loans, withdrawals, or surrender
  2. Apply for living benefits
  3. Life settlements

Not all options are available to everyone, as some have requirements related to age, health, and policy details. If you have several options available, the best choice depends on several factors like whether you want to keep the policy or not and the amount of money that you want to access. To help you understand your options, here’s more information on the ways to cash out a life insurance policy.

Infographic showing ways to cash out a life insurance policy while alive

Option 1: Tap Into Your Policy’s Cash Value

If you have permanent life insurance and want to tap into the policy’s cash value while you’re alive, you can do it in three ways:

1. Loans 

Most life insurance companies allow policyholders to take a loan from the accumulated cash value of their policy. These loans don’t have any repayment schedule like other loans. However, these loans will accumulate interest charges that directly affect your death benefit, as any money that hasn’t been paid back when the policyholder dies will be taken from the death benefit amount. This means you get less death benefit than you’re supposed to.

Alternatively, you could seek programs from other companies like our Whole Life Loan Program that may allow you to get 95% of your policy’s cash surrender value.

2. Withdrawals

Withdrawals allow you to take money from the cash value of your policy without worrying about interest charges. This is likely the easiest and fastest way to cash in a life insurance policy. However, you need to remember that withdrawals might lead to a change in your policy premiums and can affect your life insurance benefits. By taking money out, you’re reducing the long-term growth potential and may leave a smaller death benefit to beneficiaries.

3. Surrender

Surrendering a policy is synonymous with canceling it. Once you cancel your policy, it releases all the cash value to the policyholder minus fees from the process. However, before surrendering, you need to be sure that you don’t need the coverage of the policy anymore. Furthermore, some policies will charge a penalty if you cash out too early and you may also owe income tax if your payout exceeds the premiums you paid over the policy’s life. 

Getting cash out of your life insurance by tapping into its cash value is the easiest way to cash in the life insurance policy. However, it doesn’t work for term life insurance policies since this type of life insurance doesn’t have any cash value; a term policy would have to be converted into a permanent policy in order to be cashed out.

Option 2: Use Your Policy’s Living Benefits

Living benefits are another way to get the cash out of your life insurance policy while you’re still alive. Life insurance with living benefits allows you to cash in a portion of your insurance in advance, which is up to 50% in most cases. However, to access these benefits, there are certain criteria. You can only access these benefits if you meet the circumstances listed below:

1. Chronic illness benefits

Chronic illnesses, as you might know, stay with you for a long time. Most people suffering from chronic illnesses need assistance for at least two out of all activities that are required daily (known as ADLs) such as bathing, eating, dressing, or sitting and standing. If you’re suffering from any chronic illness that has drained you financially, you can cash out money from your life insurance as a part of your living benefits.

2. Long-term care benefits

Healthcare today is a very costly affair and people receiving long-term care need to pay a considerable amount of money to receive necessary services. Some life insurance policies offer optional long-term care riders that you can cash in to pay for assisted living costs. 

3. Terminal illness benefit

Those who are certified as terminally ill by physicians with a life expectancy of fewer than 12 months can apply for living benefits and are eligible to cash in their life insurance.

While all these benefits may come standard in most life insurance policies, make sure that you are buying life insurance with living benefits. Some policies might contain various terms and conditions that might restrict you from accessing them. You may also be able to sell your policy through a viatical settlement.

Option 3: Sell Your Policy Through A Life Settlement

The final way a policyholder can cash out their life insurance while you’re alive is by selling the policy through a life settlement. A life settlement is a transaction in which a life insurance policyholder sells their policy to a third-party investor in return for a one-time cash payment. 

If you don’t need the death benefits linked to your insurance, selling the policy is the best way to cash out because you’ll get far more money than you would by surrendering or letting it lapse. In fact, with a life settlement you may be able to get up to 60% of the death benefit amount in a lump cash sum that can be used to fund retirement, go on vacation, or spend however you want.

Though the amount you receive through a life settlement is less than the actual death benefit, it provides more cash than other options listed above. On average, selling a life insurance policy can pay seniors 4 to 11 times more than what they’d get from surrendering it to the insurer. Due to this, life settlements are considered to give you the best ROI. Moreover, life settlements are an excellent option for people who no longer need a death benefit for supporting their families.

To be eligible for a life settlement, you must have a whole, variable, universal, or convertible term policy and in most cases must be at least 70 years old.

What To Consider When Using Life Insurance While Alive

Most people buy life insurance to create a financial safety net for loved ones upon their death, but there are ways to access the value of the policy while alive. Cashing out a policy early can provide financial support now, but it typically means a lower payout in the future. To decide if you should use your life insurance while alive, here are some important considerations.

Coverage Needs

Would you like to maintain life insurance coverage after cashing out, or are you fine with no longer having coverage? If you want to keep coverage, you can simply withdraw money from the cash value you’ve accumulated or take a loan on it from the insurance provider. You may also be able to cash out using living benefits to help pay for care services while maintaining coverage. If you no longer need coverage, you can surrender or sell the policy to get your cash value and a one-time cash payment from the insurance provider or life settlement company.

Financial Situation

Do you need a lot or a little money, and do you need it now or can you wait a few months? If you’re in a bind and need a little extra cash now, withdrawing money is likely your best option. However, if you need a larger sum or if you can afford to wait, you can look at other ways to cash out a policy such as a loan, surrender agreement, or selling the policy.

Beneficiary Needs

Will your beneficiaries have the financial means to support themselves with a reduced death benefit, or potentially no death benefit at all? Consider the needs of your loved ones to ensure they won’t be left in a difficult spot upon your death.

Hidden Fees and Conditions

Are there any fine print details that would reduce the amount you get from cashing out your policy? Insurance policies are often packed with confusing language, so it’s a good idea to read carefully and even let a financial advisor take a look to make sure you don’t get any surprise fees or clauses that reduce your payout at the last minute.

Should You Cash Out Your Life Insurance?

While the real purpose of life insurance is to provide death benefits to support your loved ones, that doesn’t mean that you cannot reap the benefits of your policy while you’re alive. The options mentioned above can allow you to cash in your life insurance policy, whether you need that money urgently or can afford to wait. Cashing out your life insurance policy is a great way to access money when you need it, but the option you should use depends on how much money you need and whether you want to maintain coverage.

If you only need a small sum, withdraw money or take a small loan from your policy. If you need a much larger amount, see if you are eligible for living benefits or consider selling your policy through a life settlement.

Contact us or call us today at (800) 694-0006 to get in touch with our team to discuss your options for cashing out your life insurance policy and find out how much you can get for your life insurance policy.

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Avery Logan

Avery Logan

Avery Logan is a writer for Harbor Life Settlements with expertise on insurance, finance, and senior care. He specializes in breaking down complex subjects in a way that's easy for people to understand so they can feel informed about what they're reading.

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