When you need urgent cash, your life insurance policy may never cross your mind. You probably purchased it for your loved ones to use when you are gone. But you are still here and looking for different ways to pay your bills. Just so you know, a permanent life insurance policy may provide you with the emergency funds that you need.
However, this is only possible with a cash-value life insurance policy. You can access your cash in different ways. Before you do this, here is everything you need to understand about withdrawing money from your life insurance policy.
Can I withdraw money From my Life Insurance Policy?
Cash value Life insurance, such as whole life or universal life, allows you to tap into the policy’s cash value. One option is to surrender the policy for cash, though this will terminate the policy and any payout will be reduced by surrender fees. Alternatively, you can take a loan or withdraw funds from the cash value without canceling the policy entirely.
Does my Life Insurance have Cash Value?
To withdraw funds from your life policy, it needs to be a permanent policy that has built up cash value over time, which can take years. Term life insurance, known for being cost-effective, doesn’t accumulate cash value and only offers coverage for a set period.
Permanent life policies, such as whole or universal life, are typically more expensive than term life. Part of your premium goes into a cash value account, which you can access in the future. Whole life is the most common type of permanent life policy, while universal, variable universal, and indexed universal life policies also accrue cash value over time. However, if your policy is new, it may not have much cash value yet.
Building cash value in permanent policies is like saving over time. It usually takes several years of paying premiums for enough cash value to accumulate. Keep in mind that surrender charges may apply for early withdrawals in the first five to 15 years of the policy, potentially making this option expensive.
Additionally, the monetary worth of your policy could fall below either the sum of premiums paid or the coverage amount you acquired. Over time, whole-life policies can reach the death benefit amount, often by age 100, if no withdrawals or loans have been taken. The performance and premiums of other permanent policies will influence how closely the cash value matches the death benefit.
How to Get Cash From Your Life Insurance
If your policy has a cash value, you can use the money for whatever you need it for. But you need to know that taking cash out of your life insurance is a serious decision. Ensure that you check with your agent or read the contact information before taking action.
Withdraw
With permanent life insurance, you can often take out some cash value without ending your coverage. This means your beneficiaries will receive a lower payout when you pass away. Withdrawals up to the amount you’ve paid in premiums are generally not taxable. This process may be known as partial cash surrender since you’re giving up a portion of your coverage.
Surrender the Policy
You can fully cancel your policy and receive the cash value minus any fees, known as the surrender value. However, this means you will no longer have coverage, and your beneficiaries won’t receive a death benefit upon your passing.
If you cash out early, there may be a penalty called a surrender charge. Additionally, if your payout exceeds the premiums you paid, you may owe income tax on the profit. It’s generally not advisable to surrender your policy unless you are certain your beneficiaries no longer require the policy benefit.
Borrow the cash that you need
Instead of taking cash out, you can opt to borrow from your life insurance policy. This can be a quick and easy way to access funds for a purchase, retirement income, or temporary expenses during a job loss. You’re not required to repay the loan, but if you don’t, the amount you borrowed plus interest will be deducted from the death benefit your beneficiaries receive.
Like any loan, borrowing comes with interest charges that increase the amount owed over time. However, you may still earn interest on the outstanding loan. For instance, if your loan interest rate is 5% and the return on your cash value is 7%, you would still earn 2% on the borrowed amount. However, if market returns drop to 0%, you’d pay the full 5% loan interest.
Be cautious when borrowing from your cash value to avoid borrowing too much. If the total loan amount, including interest, matches the policy’s cash value, the policy could lapse.
Sell your policy for cash
A life settlement allows you to sell your policy to a third party for more than its cash value but less than the death benefit. In this process, you receive a lump-sum payment, and the buyer takes over the policy premiums. After you pass away, the buyer collects the death benefit.
Consider life settlements if you need a significant amount of cash right away and no longer need the life policy. Being older and in poorer health can increase the amount you might receive. It’s important to work with reputable life settlement companies and compare offers from different sources.
Remember that there may be fees associated with life settlements, and you may have to pay income taxes on the amount you receive from selling the policy.
Is there a penalty for withdrawing money from Life Insurance?
No, there is no penalty for withdrawing or cashing out a policy. However, there may be a surrender fee, depending on the policy. It also depends on how long you have had the policy.
Alternatives to withdrawing from Life Insurance
If you purchased a policy to protect your family, you might want to explore other options to access cash instead of cashing out your policy.
- Home Equity Loan: Consider borrowing against your home’s equity through a second mortgage. Understand any associated fees and closing costs.
- Personal Loan: This can be a quick way to access cash ranging from $1,000 to $50,000.
- Credit Card with an Introductory Rate: If you need a smaller amount of cash and can repay it soon, a credit card with a 0% APR introductory offer may work.
- Borrowing from a Retirement Account: A 401(k) loan lets you access retirement funds at a lower interest rate than a personal loan.
Before deciding to withdraw from your life insurance policy, explore alternatives such as home equity loans, personal loans, and 0% APR credit cards. These options can provide the cash you need without sacrificing your policy’s benefits for your loved ones. Remember to consider the costs and implications of each option and consult with a financial advisor for personalized guidance.