Life insurance policy is a contract between an insurer and a policyholder, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured. However, there may come a time when you need the money now and wonder if you can “cash in” your life insurance policy. In this article, we will explore the options you have and what you need to consider before making any decisions.
What Does It Mean to Cash in a Life Insurance Policy?
If you “cash in” your life insurance policy, it means you are surrendering your policy to the insurance company in return for a cash payout. The amount you receive will be less than the death benefit, but it can help you cover immediate financial needs or supplement retirement income.
There are three ways to cash in a life insurance policy – surrender, sell, or borrow. Let’s take a closer look at each option.
Option 1: Surrendering Your Life Insurance Policy
Surrendering your life insurance policy means you are terminating the policy and forfeiting the death benefit. You will receive the cash surrender value, which is the accumulated cash value minus any surrender charges and fees.
The cash surrender value may be taxable, so it’s important to check with a tax professional before making any decisions. Additionally, surrendering your policy may have an impact on your eligibility for Medicaid or other government assistance programs.
Before surrendering your policy, consider your financial needs and whether there are other options available to you.
Advantages of Surrendering Your Life Insurance Policy
There are several advantages to surrendering your life insurance policy:
| Advantages of Surrendering Your Life Insurance Policy |
|---|
| You will receive cash immediately |
| You will no longer have to pay premiums |
| You can use the cash to pay bills, debt, or other expenses |
Disadvantages of Surrendering Your Life Insurance Policy
There are also disadvantages to surrendering your life insurance policy:
| Disadvantages of Surrendering Your Life Insurance Policy |
|---|
| You will lose the death benefit |
| You may have to pay taxes on the cash surrender value |
| You may be disqualified from government assistance programs |
Option 2: Selling Your Life Insurance Policy
If you no longer need your life insurance policy or cannot afford the premiums, you may be able to sell your policy to a third-party investor in a process called a life settlement or viatical settlement.
The investor will pay you a lump sum of cash, which is often higher than the cash surrender value but less than the death benefit. The investor will then become the new beneficiary of the policy and will receive the death benefit upon your death.
Before selling your policy, it’s important to understand the potential risks and benefits and to work with a licensed broker or financial advisor who can help you navigate the process.
Advantages of Selling Your Life Insurance Policy
There are several advantages to selling your life insurance policy:
| Advantages of Selling Your Life Insurance Policy |
|---|
| You will receive a lump sum of cash |
| You can use the cash to pay bills, debt, or other expenses |
| You will no longer have to pay premiums |
Disadvantages of Selling Your Life Insurance Policy
There are also disadvantages to selling your life insurance policy:
| Disadvantages of Selling Your Life Insurance Policy |
|---|
| You will forfeit the death benefit |
| The lump sum may not be enough to cover your financial needs |
| The investor may profit more than you |
Option 3: Borrowing Against Your Life Insurance Policy
If you have a permanent life insurance policy with cash value, you may be able to borrow against the policy’s cash value. The loan is secured by the policy’s cash value, and you will repay the loan with interest. If you do not repay the loan, the outstanding balance will be deducted from the death benefit.
Borrowing against your life insurance policy can be a convenient way to access cash without surrendering your policy or selling it to a third-party investor. However, it’s important to remember that the loan will reduce the cash value and death benefit of your policy.
Advantages of Borrowing Against Your Life Insurance Policy
There are several advantages to borrowing against your life insurance policy:
| Advantages of Borrowing Against Your Life Insurance Policy |
|---|
| You can access cash without surrendering your policy or selling it |
| You do not have to undergo a credit check |
| The interest rate may be lower than other types of loans |
Disadvantages of Borrowing Against Your Life Insurance Policy
There are also disadvantages to borrowing against your life insurance policy:
| Disadvantages of Borrowing Against Your Life Insurance Policy |
|---|
| The loan will reduce the cash value and death benefit of your policy |
| Failure to repay the loan will result in a deduction from the death benefit |
| The interest rate may be higher than other types of loans |
FAQ: Frequently Asked Questions About Cashing in a Life Insurance Policy
Q: Can I cash in my term life insurance policy?
A: No, term life insurance policies do not have a cash value, so they cannot be surrendered, sold, or borrowed against.
Q: What is the cash surrender value?
A: The cash surrender value is the accumulated cash value minus any surrender charges and fees.
Q: Is the cash surrender value taxable?
A: The cash surrender value may be taxable, so it’s important to check with a tax professional before making any decisions.
Q: Will surrendering my policy affect my eligibility for Medicaid or other government assistance programs?
A: Yes, surrendering your policy may have an impact on your eligibility for Medicaid or other government assistance programs.
Q: Can I sell my policy if I am terminally ill?
A: Yes, if you have a life expectancy of two years or less, you may be able to sell your policy in a viatical settlement.
Q: How do I borrow against my life insurance policy?
A: You will need to contact your insurance company or financial advisor to request a loan application. The loan is typically processed quickly and does not require a credit check.
Q: How much can I borrow against my life insurance policy?
A: The amount you can borrow will depend on the cash value of your policy and the terms of your loan. Most policies allow you to borrow up to 90% of the cash value.
Q: Do I have to repay the loan?
A: Yes, you will need to repay the loan with interest. Failure to repay the loan will result in a deduction from the death benefit.
Q: Can I cancel my loan?
A: Yes, you can cancel the loan at any time, but you will need to repay the outstanding balance with interest.
Before making any decisions about cashing in your life insurance policy, it’s important to consider your financial needs, tax implications, and long-term goals. Working with a licensed broker or financial advisor can help you make an informed decision that’s right for you.