If you are scrambling for money, you might be considering liquidating your assets for cash and are looking at your existing life insurance policy, wondering if it is possible to cash it in. The answer is yes; it is usually possible to get a cash value from your life insurance policy, depending on your policy type. Let’s look at how you go about cashing in your life insurance policy.
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Ways to Withdraw Money From a Life Insurance Policy
There are a few different ways that you can withdraw money from a life insurance policy:
Take a Loan from Your Life Insurance
If you have a cash-value life insurance policy, you will usually be allowed to take out a loan using the cash accumulation amount as collateral. The good thing about this option is that you will not be required to qualify based on your finances, but the loan’s interest rates could vary.
Surrender a Policy
Another option is to surrender your life insurance policy, meaning that you cancel it and then use the cash you need. If you are still in the early years of your life insurance policy, your provider will likely charge surrender fees that will reduce the cash value, which will vary according to the time you have had your policy. In addition, the gain on the policy is subject to income tax.
The third way you can get money from your life insurance policy is to sell it to an individual or a life settlement company in exchange for cash. The new owner of your life insurance policy will pay the premiums to keep the policy enforced but will receive the death benefit when you die. They will also have access to your medical records and the right to request updates on your current health. Most types of life insurance are eligible, but there are generally requirements for the person insured, such as age, life expectancy, and the amount in the death benefit.
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Consequences of Making Cash-Value Withdrawals
Typically, it is possible to make cash-value withdrawals from your life insurance policy when needed. However, be aware that there can be consequences to doing so:
- Withdrawals that reduce the cash value of your life insurance policy can cause a reduction in the death benefit that your beneficiaries need.
- Cash-value withdrawals are not always tax-free.
- They are treated as taxable to the extent that they exceed your basis in the policy.
- Withdrawals that reduce the cash surrender value could cause your premiums to increase to maintain the same death benefit.
Alternative Ways to Get Cash When You Need It
Cashing out a life insurance policy can be a good way to get money fast but have consequences. Instead of getting the cash value for all or part of your life insurance policy, consider a few other ways to access cash when you need it.
If you need money for a large purchase or to consolidate debt, a personal loan is often a good choice because they charge lower interest rates than credit cards. However, they can be hard to obtain for people with low credit scores or unable to afford monthly payments. Although a little harder to obtain, it’s not impossible. Use an online loan comparison tool to weigh your options.
Home Equity Loan
If you own your home outright or make mortgage payments, you will qualify for a home equity loan, allowing you to borrow a part of your home’s equity at a fixed interest rate. The interest rates on a home equity loan are often lower than both credit cards and personal loans, but you could risk foreclosure if you fall behind on payments.
0% Intro APR Credit Card
If you are confident that you can pay off a balance quickly, then a 0% Intro APR credit card could be a great option. They allow you to transfer balances from high-interest credit cards or can be used for purchases, and there will be no interest charges during the intro period as long as you make at least the minimum payments. However, these often require good credit. Not sure where to start looking for the right credit card to help access some extra funds? We’ve got you covered.
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If you face a large, unexpected expense or have fallen on hard times, you might consider cashing in your life insurance policy. It is possible to do so, and there are a few different ways you can make it happen, but there are consequences like any other way of accessing cash. If you do not need as much coverage, then cashing in your life insurance policy could be a good option, but make sure to explore all of your options.
Have more questions about life insurance in general? Insurdinary can help. Our team of experts specialize in all things insurance, whether you are young and investing, in your professional prime, have pre-existing conditions or even when you’re in your golden years. There is a suitable life insurance policy for everyone. Fill out our quick quote form here. Prefer to speak to an agent? We can do that too. Call us at 1-877-574-7475. We look forward to working with you.