Can I Cash Out My Life Insurance Policy?

If you need some cash to cover an emergency expense, a major life change, or you want to cover your child’s education, your life insurance might provide an unexpected solution. If your policy has accrued some value and you’re in a crunch, you can look toward your life insurance for help, and here’s how.

Which Life Insurance Policies Qualify?

Whether you can access funds from your life insurance policy depends on the type of life insurance you have.

Term Life insurance:

Unfortunately, term life insurance, which provides coverage for a fixed period of time at a low rate, does not have cash value. Neither does the group term life insurance your workplace might provide.

Whole life insurance:

If you have a whole or universal life insurance policy, which provides coverage through the end of your life, part of your premium payments go into an investment account and build cash value. You can withdraw a portion of that cash value, surrender the entire policy, receive almost the whole amount, or even borrow against your life insurance.

Pros and cons of cashing out your policy

Cashing out your life insurance policy can rescue you from a financial bind, but it’s not without risk. While you ponder this consequential decision, carefully weigh the pros and cons first.

Pros

• Unlike a loan, tapping into your life insurance provides you with financial support that you don’t have to pay back.
• If you withdraw only the equivalent of the premiums you paid into a life insurance policy, that amount is not taxable.
• If you’re struggling to pay your life insurance premiums, you can cover them with the cash value your policy has accumulated.

Cons

• Cashing out will result in a smaller death benefit or increase your premiums. Surrendering your life insurance completely means your beneficiaries won’t receive any death benefit.
• If you withdraw more than your basis during the first 15 years you’ve had the policy; you might be susceptible to taxation.
• Some policies charge fees for withdrawals and especially for surrendering your policy.

If the benefits of cashing out your life insurance aren’t worth the risk to you, you might consider a loan instead.

What About Life Insurance Loans?

When you take out a life insurance loan, you’re borrowing from the life insurance company, using your policy’s cash value as collateral. Life insurance loans have many advantages over traditional loans.

• You don’t have to go through a long, nerve-wracking application process to obtain a life insurance loan. Simply complete the required forms provided by the insurance provider and quickly get your loan, as long as you have enough cash value.
• There’s no credit check involved with a life insurance loan, and these loans don’t affect your credit report.
• You’re also not held to a strict repayment schedule. So, if you die before repaying the life insurance loan, the remaining balance is taken from the death benefit.

Because of these advantages, many people take out life insurance loans to pay for their children’s college tuition. This protects them from the many pitfalls of student loan debt. Life insurance loans are also a good option if you need money quickly and can’t wait for an application to process or if you don’t qualify for a traditional loan.

Your life insurance policy can provide you and your loved ones with a financial safety net, even when you’re still around. It’s important to look closely at all your options and make the decision that’s best for your family, whether that’s taking out a life insurance loan or cashing out your policy.

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