Can You Cash Out Life Insurance Before Death?

 

Key Takeaways
– You can cash out some types of life insurance policies before death, but not all.
– The main ways to cash out a life insurance policy are withdrawing the cash value, borrowing against the cash value, surrendering the policy, or selling the policy to a third party.
– Cashing out a life insurance policy can have tax implications, fees, and other drawbacks.
– You should weigh the pros and cons of cashing out a life insurance policy and consider your alternatives before making a decision.

Life insurance is a financial product that pays a lump sum to your beneficiaries if you die while the policy is in force. It can provide peace of mind and financial security for your loved ones in the event of your death.

But what if you need money while you are still alive? Can you cash out a life insurance policy before death? The answer depends on what type of life insurance policy you have and how you want to access the money.

In this article, we will explain the different types of life insurance policies and how they can be cashed out before death. We will also discuss the tax implications, fees, and other drawbacks of cashing out a life insurance policy. Finally, we will suggest some alternatives to cashing out a life insurance policy that might suit your needs better.

Types of life insurance policies

There are two main types of life insurance policies: term life and permanent life. Term life insurance policies have a limited lifespan, usually between 10 and 30 years. They only pay out if you die during the term of the policy. They do not have any cash value, which means they cannot be cashed out before death.

Permanent life insurance policies last for your entire life, as long as you pay the premiums. They also have a cash value component, which is a savings account that grows over time within the policy. The cash value can be accessed in various ways before death, depending on the type of permanent life insurance policy you have.

There are several subtypes of permanent life insurance policies, such as whole life, universal life, variable life, and variable universal life. They differ in how the cash value is invested and how flexible the premiums and death benefits are. For simplicity, we will focus on the two most common types of permanent life insurance policies: whole life and universal life.

Whole life insurance

Whole life insurance is the simplest and most traditional type of permanent life insurance. It offers a fixed premium, a fixed death benefit, and a guaranteed cash value growth rate. The cash value grows at a predetermined rate set by the insurer, usually based on the performance of its general account.

The main advantage of whole life insurance is that it provides certainty and stability. You know exactly how much you will pay, how much your beneficiaries will receive, and how much your cash value will grow over time.

The main disadvantage of whole life insurance is that it is more expensive than term life insurance and other types of permanent life insurance. It also offers less flexibility and control over your investment options and policy features.

Universal life insurance

Universal life insurance is a more flexible and customizable type of permanent life insurance. It offers a variable premium, a variable death benefit, and a variable cash value growth rate. The cash value grows based on the performance of a specific investment account chosen by the policyholder, such as a stock index fund or a bond fund.

The main advantage of universal life insurance is that it allows you to adjust your premium payments, death benefit amount, and investment choices according to your changing needs and preferences. You can also access your cash value more easily than with whole life insurance.

The main disadvantage of universal life insurance is that it involves more risk and complexity than whole life insurance. You are responsible for managing your investment account and monitoring its performance. You also face the possibility of losing money if your investments perform poorly or if the insurer charges high fees or interest rates.

How to cash out a life insurance policy before death

If you have a permanent life insurance policy with a cash value component, you have several options to access that money before death. However, each option has its pros and cons, and some may not be available for all types of policies or situations. Here are the main ways to cash out a life insurance policy before death:

Withdraw the cash value

One way to cash out a life insurance policy is to withdraw some or all of the cash value from your policy. This means that you take out money from your savings account within the policy and receive it as a lump sum payment.

The advantage of withdrawing the cash value is that it is usually tax-free up to the amount of premiums you have paid into the policy. This means that you do not have to pay income tax on the money you withdraw, as long as it does not exceed your cost basis (the total amount of premiums minus any dividends or previous withdrawals).

The disadvantage of withdrawing the cash value is that it reduces both your cash value balance and your death benefit amount by the same amount. This means that you will have less money available for future withdrawals and less money for your beneficiaries when you die. It also means that you may have to pay higher premiums to maintain the same level of coverage.

Borrow against the cash value

Another way to cash out a life insurance policy is to borrow against the cash value from your policy. This means that you take out a loan from your insurer using your cash value as collateral and receive it as a lump sum payment.

The advantage of borrowing against the cash value is that it does not reduce your cash value balance or your death benefit amount, as long as you repay the loan with interest. This means that you can still access your cash value for future withdrawals and leave the full amount of money for your beneficiaries when you die.

The disadvantage of borrowing against the cash value is that it is not tax-free. You have to pay interest on the loan, which is usually higher than the interest rate earned by your cash value. You also have to repay the loan with interest, either by making regular payments or by deducting it from your death benefit when you die. If you fail to repay the loan, your policy may lapse and become void, leaving you without any coverage or cash value.

Surrender the policy

Another way to cash out a life insurance policy is to surrender the policy to your insurer. This means that you cancel your policy and receive the cash value as a lump sum payment.

The advantage of surrendering the policy is that it gives you access to the full amount of your cash value, minus any surrender charges or fees. This means that you can use the money for any purpose you want, such as paying off debts, investing in other assets, or spending on personal needs.

The disadvantage of surrendering the policy is that it terminates your coverage and forfeits your death benefit. This means that you will no longer have any protection for your loved ones in case of your death. It also means that you may have to pay income tax on the money you receive, if it exceeds your cost basis.

Sell the policy

Another way to cash out a life insurance policy is to sell the policy to a third party, such as a life settlement company or an individual investor. This means that you transfer the ownership and beneficiary rights of your policy to someone else in exchange for a lump sum payment.

The advantage of selling the policy is that it may give you more money than surrendering the policy or withdrawing the cash value. This is because the buyer may be willing to pay more than the cash value of your policy, depending on factors such as your age, health, and life expectancy.

The disadvantage of selling the policy is that it involves giving up all rights and benefits of your policy to someone else. This means that you will no longer have any control over your policy or any say in who receives the death benefit when you die. It also means that you may have to pay income tax on the money you receive, if it exceeds your cost basis.

Tax implications of cashing out a life insurance policy before death

Cashing out a life insurance policy before death can have tax implications, depending on how you do it and how much money you receive. Here are some general rules to keep in mind:

• Withdrawals are usually tax-free up to your cost basis, but taxable beyond that.
• Loans are not taxable, but interest payments are.
• Surrenders are taxable on the amount that exceeds your cost basis, minus any surrender charges or fees.
• Sales are taxable on the amount that exceeds your cost basis, minus any commissions or fees.

However, these rules may vary depending on your specific situation and tax bracket. Therefore, it is advisable to consult a tax professional before cashing out a life insurance policy before death.

Drawbacks of cashing out a life insurance policy before death

Cashing out a life insurance policy before death can have drawbacks, besides tax implications. Here are some potential disadvantages to consider:

• You may lose valuable coverage and protection for your loved ones in case of your death.
• You may reduce or forfeit your death benefit amount for your beneficiaries.
• You may have to pay higher premiums or interest rates to maintain or restore your coverage.
• You may incur fees, charges, or penalties for accessing or terminating your policy.
• You may lose some or all of the guarantees and benefits offered by your policy.
• You may miss out on future growth opportunities or dividends from your policy.

Therefore, it is important to weigh the pros and cons of cashing out a life insurance policy before death and consider your alternatives carefully.

Alternatives to cashing out a life insurance policy before death

Cashing out a life insurance policy before death is not always the best option for accessing money while you are still alive. There may be other ways to meet your financial needs without compromising your coverage or benefits. Here are some possible alternatives to consider:

• Reduce your expenses and save more money from your income.
• Sell some of your assets or investments that are not essential or performing well.
• Borrow money from
• Borrow money from a friend, family member, or a reputable lender who offers reasonable terms and interest rates.
• Seek financial assistance or advice from a professional, such as a financial planner, a credit counselor, or a legal aid.
• Explore other options to access money from your life insurance policy without cashing it out, such as:
• Accelerated death benefit: This is a feature that allows you to receive a portion of your death benefit in advance if you are diagnosed with a terminal illness or a chronic condition that requires long-term care. This can help you pay for medical expenses or other needs while you are still alive. However, this option may reduce your death benefit amount and may have tax implications.
• Policy dividend: This is a payment that some insurers make to their policyholders based on the performance and profitability of the company. If your policy is eligible for dividends, you can use them to pay your premiums, increase your cash value, buy additional coverage, or receive them as cash. However, dividends are not guaranteed and may vary from year to year.
• Policy rider: This is an add-on that enhances or modifies the features and benefits of your policy. Some riders may allow you to access money from your policy under certain circumstances, such as critical illness, disability, unemployment, or retirement. However, riders may increase your premium cost and may have eligibility requirements and limitations.
  

  Conclusion

  Cashing out a life insurance policy before death is possible for some types of policies, but not all. It can provide you with immediate cash, but it can also have negative consequences for your coverage, benefits, taxes, and fees. Therefore, you should carefully consider the pros and cons of cashing out a life insurance policy before death and explore your alternatives before making a decision.

  If you need more information or guidance on how to cash out a life insurance policy before death, you can contact your insurer, agent, or broker. They can help you understand your options and the implications of each one. You can also use Bing to search for more resources and articles on this topic.