How to Cash Out Your Life Insurance Policy
Many people who have a life insurance policy that struggle to pay premiums simply stop paying and allow their policy to lapse. While this option may put the money of the premiums into your pocket you have other possible courses of action. If you are currently paying for a life insurance policy that you can no longer afford, or no longer have need for, one option available to you would be to cash out your policy.
What this means is that if you have a cash-value life insurance policy, such as a whole life or universal life, your policy provider takes a fraction of your premiums and puts it in a cash-accumulation account that is part of the policy. This is usually some sort of investment account. This money can be accessed through policy loans, or partial to full surrender of the policy. If you decide to cash out your life insurance policy, you would receive a pay out in a timely manner and could use that money for whatever expenses you might need covered. The exact details of this transaction, such as the amount you would receive, would depend on your life insurance provider and their policies.
The main drawback of this method is that while you would receive your cash relatively quickly you will no longer have a death benefit as you will no longer have a life insurance policy. Additionally, the amount you receive will in no way be near the amount you would receive from a life settlement. Other consequences of surrendering your policy might include a tax on any value that you gain, as well as possibly being subject to surrender fees. Another consideration would be that if you decide to replace the death benefit later it might be more difficult or even more expensive to get the same coverage.
Another option that is generally available to policy holders is a cash withdrawal. A cash withdrawal is just that, taking cash from your life insurance policy. The amount available for this depends both on your life insurance policy as well as the provider. A withdrawal can also have potentially unexpected consequences. Not all withdrawals are tax-free, they could also reduce the cash surrender value which may cause your premiums to increase and ultimately a withdrawal could reduce the death benefit of your policy.
Taking out a Loan
Policy holders may also seek to take out a loan from their policy. In this situation policy holders could take out a loan using their cash-accumulation as collateral. A loan might be subject to varying rates of interest, as well as any other regulations set by the insurance provider. Typically, you are not obligated to financially qualify for the loan. The amount available to receive varies based on the how much is available in the cash-accumulation account. The loan could also be subject to tax as well depending on the type of policy you have. The downsides to this would be that in most cases taking a loan reduces the death benefit of the policy. Also, unpaid loans can cause policies to lapse meaning your beneficiaries would not receive any death benefit.
A popular alternative to a cash out of a life insurance policy is a life settlement. A life settlement is where the holder of a life insurance policy sells their life insurance policy to an investor. This allows people who are looking to cash out their life insurance policy to receive a significant amount more than the insurance company would offer. While there are some conditions that need to be met in order to eligible for a life settlement it is generally the best option for those looking to cash out their policy. You need to be at least 65 years old and have a life insurance policy worth at least $100,000. If you meet these prerequisites, then a life settlement could net you as much as three to four times the amount of the typical cash out of the life insurance policy.
The main drawback to a life settlement is that while it is a simple process it takes time to receive the benefit. A typical life settlement process takes 90 to 120 days from application to receiving the benefit, however if you can afford to wait and if you qualify this is the most lucrative option available. If you are interested in estimating the value, you would receive from a life settlement you can try our estimator here.
If you are looking to cash out your life insurance policy remember that you have options. If you cannot wait because of financial obligations or some other reason you should try to withdraw or borrow cash from the policy rather than outright surrendering the policy or allowing it to lapse. If you can make it three to four months you should seek to receive a life settlement.
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