As you get older, your financial needs and priorities can shift dramatically. Maybe your kids are grown and you find yourself wondering, can you cash out a life insurance policy? After all, those premium payments add up and that money could be helpful for covering living expenses or enjoying retirement. Let’s explore whether it’s possible to withdraw cash from your life insurance policy before the policy’s term is up and what to consider when making this big decision.
Because accessing your life insurance’s cash value can have significant consequences for your coverage, it’s important to understand all your options before deciding if cashing out is the right choice for you. The ability to cash out a life insurance policy depends entirely on the type of policy you have.
Understanding the Types of Life Insurance Policies
The first step is to identify what kind of life insurance you own. Life insurance comes in two main categories: term life and permanent life insurance.
Term Life Insurance
Term life insurance is like renting coverage. It provides protection for a specific period, such as 10, 20, or 30 years. If you pass away during the policy’s term, your beneficiaries receive the death benefit.
Term life insurance is generally less expensive but it doesn’t have a cash value component. So, you generally cannot cash out a term life insurance policy. If you’re thinking about canceling a term life policy to get a new one, compare term life insurance quotes from several insurers to make sure you’re getting the best deal.
Permanent Life Insurance
Permanent life insurance, such as whole life and universal life insurance, provides lifelong protection and does build cash value. Part of each premium payment goes toward the death benefit and the rest accumulates in a cash value account that grows over time.
This growth is usually tax-deferred, which can be appealing for long-term savings. With permanent life insurance you essentially have two ways to access cash, although it may not be in the exact way you think. This often involves either surrendering the policy for its cash surrender value or taking out a policy loan against the policy’s cash value.
When Can You Cash Out a Life Insurance Policy?
This brings us to the main question: can you cash out a life insurance policy? As we learned, you typically can only cash out permanent life insurance policies that have a cash value component.
Surrendering Your Policy
This means giving up your life insurance policy in exchange for the accumulated cash value, less any surrender fees. It can seem like a quick way to get a chunk of money but it means you lose the death benefit for your beneficiaries.
Surrender charges can be significant, especially if you cash out early in the policy’s term. It’s crucial to know that any gains you make by surrendering your policy could be subject to income taxes, making this a less-than-ideal option in many situations.
Taking a Loan Against Your Policy
Permanent life insurance policies generally allow policyholders to borrow up to 90% of the accumulated cash value. You repay the loan with interest, and if you don’t repay the loan in full before your passing, the outstanding loan balance is typically deducted from the death benefit.
While this method keeps your life insurance policy active, it reduces the amount your beneficiaries will receive upon your death. It’s also important to note that the insurer may have limitations on how the loan is used. Plus, if you don’t make timely interest payments, your policy could lapse.
What Happens If I Don’t Touch My Cash Value?
It is entirely your choice to use the cash value of your permanent life insurance. If you don’t need the cash, the money continues to accumulate and can increase the size of the death benefit. Your beneficiaries will then receive a larger payout upon your passing.
For older policyholders, some permanent life policies allow using the cash value to pay policy premiums. This could be useful when you’re retired and want to keep your insurance coverage without having to dip into other funds.
Exploring Alternatives to Cashing Out
Let’s say you do need funds but aren’t sure if accessing your life insurance policy is the right choice. Before giving up your life insurance protection, explore these other possibilities:
Personal Loans
Depending on your credit score you could qualify for a personal loan with a decent interest rate. These loans don’t usually require collateral so there is no risk to your assets like your home. Credit checks are typically required when you apply for personal loans.
Home Equity Loans or HELOCs
Homeowners could leverage the equity in their home. These loan options may offer lower interest rates than personal loans, but your house acts as collateral. Failing to repay could lead to losing your home.
Borrowing from Retirement Accounts
You can borrow against some retirement plans such as a 401(k), although this can come with tax consequences if not repaid within a specific timeframe. You will want to weigh your options before deciding on withdrawing money from your retirement accounts.
Cash-Out Refinance
This option allows homeowners to refinance their mortgage for a higher amount, take out the extra cash and repay it over time through higher monthly payments. This lets you tap into home equity without taking out a separate loan.
However, you might pay higher interest and closing costs can add up. You can learn more about whether cash out refinancing is a smart financial decision by clicking on the link.
0% APR Credit Cards
Look for a credit card offering an introductory period with 0% interest. If you can pay off the balance before the interest rate kicks in, this could help bridge a short-term gap. Just watch out for potential balance transfer fees.
Considerations Before Making Your Choice
Ultimately, the best way to answer, “Can you cash out a life insurance policy?” is to talk to a financial professional about your specific needs. Consider your long-term goals, your current health status and your family’s financial dependence.
A financial advisor can provide tailored advice based on your individual circumstances.
Conclusion
So can you cash out a life insurance policy? Yes, but only if it’s a permanent policy and has accrued cash value. Surrendering or borrowing against your life insurance are major decisions with lasting effects.
So carefully consider the long-term consequences for your finances and your family’s security. Instead of cashing out, think about your alternative options. Carefully weighing your options ensures that your financial decisions align with both your current and future needs.
