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How to Cash in Life Insurance While Still Alive for Income

Many people think about life insurance as something that benefits their loved ones only after they’re gone. But you might be surprised to learn that certain insurance policies can be helpful to you while you’re still alive. Yes, it’s possible to cash in life insurance while still alive under certain circumstances.

If you’re over 50 and own a life insurance policy, you may have options for tapping into its value. Whether it’s for supplementing retirement income, covering unexpected expenses, or pursuing a dream you’ve put on hold, this could be a valuable financial tool. Let’s explore some of the most common ways you can access cash from a life insurance policy while still alive.

Understanding Cash Value

To access your policy while you’re still alive, you’ll generally need a permanent life insurance policy. These policies, like whole life insurance, universal life insurance, and variable life insurance, differ from term life insurance. While term life insurance provides coverage for a specific period, permanent policies last your lifetime and feature a cash value component.

Imagine cash value as a savings account attached to your policy. A portion of your premium payments goes toward this account, and over time, it grows. This growth is usually tax-deferred, so you don’t pay taxes on it until you withdraw it. It’s important to remember that term policies typically don’t build cash value.

The interest rate on a loan from your cash value is usually between 6-8%. This can be much more appealing than the average 12.38% rate for personal loans from traditional banks, making it a potentially more affordable way to access funds.

Ways to Cash in Life Insurance While Still Alive

There are several ways to cash in life insurance while still alive. Choosing the right one depends on your individual needs and financial circumstances. But understanding the different methods available helps make a better, more informed decision about your financial future.

1. Policy Loan

Just like with a home or car, you can take out a loan using your policy’s cash value as collateral. While your insurance policy is still in place, you’re essentially borrowing from yourself with a policy loan.

There’s often no credit check and the insurer often sets flexible repayment schedules. This is one of the key advantages over traditional bank loans, which can have more stringent qualification criteria and fixed repayment schedules making policy loans appealing to some.

Although your insurer sets the borrowing limit, this usually doesn’t exceed 90% of the policy’s cash value. Also, the interest accrued, and the outstanding loan balance will be deducted from the death benefit upon death, leaving less money for your beneficiaries. If you don’t repay the loan before you pass away, the amount you borrowed plus the interest will be taken out of the death benefit, leaving less for your beneficiaries. Consider these factors carefully, as they can significantly impact the amount your loved ones receive.

2. Withdrawal

Withdrawing money from your life insurance policy lets you take out some or all of your policy’s cash value. This money isn’t a loan, but you’re permanently reducing your policy’s death benefit. Depending on how much cash value your policy has accumulated, withdrawing could give you access to funds without needing a credit check or adding debt. This method allows you to get money from your policy without taking on debt, offering a potential solution for those seeking immediate financial relief.

Usually, withdrawals are tax-free as long as the amount doesn’t exceed the premiums you’ve paid. But, it’s essential to understand that a withdrawal reduces your death benefit. The remaining cash value may continue to grow at a lower rate, too. Carefully evaluate your long-term financial goals and the potential impact on your beneficiaries before opting for a withdrawal.

3. Surrender Your Policy

Surrendering your policy provides a lump-sum payment in exchange for terminating your life insurance coverage. This means you are giving up the insurance policy completely and your death benefit is canceled. It’s like closing a bank account—you get the entire balance but can’t use the account anymore.

In cases where a person needs significant cash or their life insurance policy is no longer needed, surrender offers immediate access to a large sum. However, you’re also sacrificing future coverage. While it’s generally tax-free if you’ve paid more in premiums than the cash value you receive, you may owe taxes on any amount that exceeds the premiums paid. Some life insurance companies may charge a surrender fee, usually if you end your policy within a specific period, such as the first ten years.

4. Life Settlement

If you no longer want or need your life insurance policy, selling it is an alternative to surrender. A life settlement allows you to sell the policy to a third party for a lump sum, which is typically less than the death benefit but more than the cash surrender value. This can be particularly beneficial when someone no longer requires the death benefit, providing an avenue to unlock some of the policy’s value. The new owner will take over premium payments and receive the death benefit upon your death. The Life Insurance Settlement Association (LISA) found that life settlement values are, on average, 622% higher than the cash surrender value, making it a potentially lucrative option.

It’s worth mentioning that this method is most often suitable for those over 65 with a policy exceeding $100,000. This option allows individuals to leverage their policy for financial gain when it no longer aligns with their needs.

Pros and Cons of Cashing in Life Insurance While Still Alive

Making decisions about your financial future requires careful consideration of the benefits and drawbacks. Let’s look at what can work in your favor and what you need to be mindful of when thinking about using the living benefits of your life insurance.

Pros:

  • Accessing cash without a credit check. This is a particularly attractive aspect for individuals with poor credit or who may find it challenging to qualify for traditional loans. It provides a potential lifeline during times of financial hardship when securing credit from other sources might be difficult.
  • Flexible repayment options with policy loans, making it easier to manage debt and tailor repayments to your financial situation.
  • Tax benefits: If withdrawals don’t exceed premiums paid, they’re generally tax-free, making it a potentially tax-efficient way to access funds.

Cons:

  • Reducing the death benefit available to your beneficiaries. This is a crucial consideration, especially if your beneficiaries heavily rely on the death benefit for financial security. It’s essential to weigh the immediate financial need against the potential impact on your loved ones.
  • Incurring potential interest charges on policy loans that reduce your death benefit. Carefully assess the interest rates and repayment terms to understand the long-term costs associated with policy loans. Failing to repay the loan can diminish the death benefit, leaving your beneficiaries with less than anticipated.
  • Possibility of tax penalties in some cases, particularly with early policy surrender. Before surrendering your policy, consult with a tax advisor to understand the potential tax implications. Early surrender can result in unexpected tax liabilities, impacting your overall financial well-being.

Before cashing in life insurance while still alive, weighing the potential impacts on your death benefit, interest charges, and tax implications is crucial. Choosing whether to take advantage of living benefits requires understanding how each choice impacts your overall financial picture.

Conclusion

Facing a financial crunch or considering options for supplementing retirement? Knowing that you can cash in life insurance while still alive may offer possibilities. With choices like policy loans, withdrawals, surrender, and life settlements, you might be surprised at the solutions that align with your current needs and help achieve your financial goals.

Regardless of which approach you choose, talking with a financial advisor is vital. Understanding all of your options fully and making sure any steps align with your overall financial strategy is critical for securing a sound financial future.

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