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What to Know About Cashing Out Life Insurance

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

To help you determine if you should cash out a life insurance policy, we’ll explain everything you need to know about the process. Learn what cashing out a life insurance policy means, your options for doing so, along with the pros and cons of this option.


What Is Cashing Out A Life Insurance Policy?

Cashing out a life insurance policy refers to 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.

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. This is because there is no difference between cashing out and cashing in a life insurance policy. The terms refer to the same process that allows policyholders to access cash value from their life insurance policies while they’re still alive.

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Can You Cash Out A Life Insurance Policy?

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 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?

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.


Ways to Cash out a Life Insurance Policy

There are three ways that you can cash out 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 ways to cash in a life insurance policy, the best option 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 while you’re still alive.

Ways to cash out a life insurance policy

If you have permanent life insurance and want to tap into the policy’s cash value, 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.


Getting Cash Out Of Your Life Insurance Through 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.


Cash Out Life Insurance Through A Life Settlement

The final way a policyholder can cash out their life insurance is by selling their policy through a life settlement. A life settlement is the process of selling your existing life insurance policy to a third-party investor in return for cash. 

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.


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 if you need cash urgently. 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 content consultant for Harbor Life Settlements with expertise on a range of health and finance related subjects. When Avery's not cranking out content, he can be found at the nearest dog park or movie theater.

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