Although life insurance is used for mainly one thing and that is to support the insured’s family after their passing. However, it has multiple other benefits too that act as an incentive for people to purchase a life insurance policy.
One such benefit is cashing in life insurance before death.
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What is the cash value of a Life Insurance policy?
In today’s world and economy where making basic ends meet is becoming harder and harder, people are often left scrambling for cash to pay their everyday expenses. As it happens, most life insurance policies have a cash value component which you can borrow cash against.
However, there are some drawbacks of using the cash value component of a life insurance policy besides compromising on your family’s long term goals, that you should keep in mind. Nevertheless, cash value insurance can prove to be an important asset if you need some quick cash.
How can you access cash?
Accessing the cash is fairly simple. Cash-value life insurance policies such as whole life insurance and universal life insurance build reserves through excess premiums and earnings. These reserves are deposited in a cash accumulation account which is within your life insurance policy.
Then you will have the opportunity to access this cash through withdrawals, policy loans or partial or full surrender of the policy. However, there is another method of obtaining cash which is called life settlement in which you can sell your life insurance policy in return of cash. Another option would be to surrender life insurance policy for cash value in which you can cancel your policy and use the cash for anything you want.
Nevertheless, whatever option you choose to obtain cash, you need to keep in mind that there will be consequences of using that cash. It will be deducted from your death benefit and the future of your family can be affected. Which is why it is not usually encouraged to use the cash from a life insurance policy even though it might help you during stressful financial times.
Can I withdraw money from my Life Insurance?
The answer is yes. You can withdraw money from your life insurance policy. However, you can only withdraw money if your policy has a cash value component. Most permanent policies have a cash value policy that can help you in your time of need. But before purchasing a policy, you should always check what the terms of the policy are and whether or not it has the components you need.
Insurance policies with a cash value accumulation are required to provide a status update of the cash accumulated at the end of the year in each of the first twenty years of the policy. You can then withdraw cash or take a loan if your policy has accumulated enough funds. Again, you should check with your insurance carrier about when you can access the fund.
How can you cash out your policy?
You can cash in life insurance while still alive. However, the first thing you would need to do is to make sure that your policy has a cash accumulation component. If you are not confirmed, you can check your policy agreement or get in touch with your insurance company. You should note that cash value policies would not normally have much accumulated as there are deductions for commissions and fees for the first few years. Which then brings us to the second step which is determining how many funds you have in your cash-value account and if they are even enough to withdraw. If you want to opt for a loan then you would have to inquire about the interest rate.
The next step would be to decide whether you want to withdraw cash or opt for a loan instead. This is an important step as loans and withdrawals both have different impacts on your policy and would require some research to make sure which one would be better suited for your needs and would be in accordance with your policy.
Experts usually advise that withdrawals not be made especially if the total cash accumulated exceeds the total premiums paid. This might act as an income and would be subjected to tax. If you are considering taking out a loan, you should find out what the interest rate would be and then compare it to other financial options that may be available to you.
You should also talk to an insurance agent so you can figure out the succeeding steps to either withdrawing or taking a loan and figure out how much you would have to pay as charges in order to receive your funds. All that will be left to do then would be to wait for your funds to arrive. You will most likely receive your funds the same way you pay your premium payments, either through a check or via automatic debit.
How long does it take to cash out Life Insurance policy?
Typically the processing of your funds can take up to 7 to 10 working days. Although your insurance company does have the right to delay your payment for up to six months. However, usually companies do not do that. Nevertheless, if you have not heard back from your insurance company or policy provider after 10 working days, you should get in touch with them and demand a follow up on your request.
Is it better to cash out your life insurance policy than to take out a loan?
As said before, withdrawals are not generally encouraged as the payout can be subjected to income tax. You should also not make any withdrawals when your policy is in its first few years as the payout would be very small and not worth the hassle. You may consider a cash withdrawal only in a situation where you might not need your policy anymore or if your financial situation has gotten so tight, you do not think you could make the premium payments without it.
However, in case you still want to keep your policy, a loan would be the wiser option. You would still be required to continue making your premium payments but your insurance company may not require you to pay back your loan as the interest amount would be enough. However, the disadvantage with this is that the amount loaned to you would then be deducted from the total payout that your family would have received on your passing, making the death benefit small.
Thus, the bottom line is, you need to carefully decide whether or not you need funds as the cash value component of a life insurance policy should not be used as it defeats the main purpose of a permanent life insurance policy which is making things easier for your family after your passing. If your beneficiaries do not end up receiving a sufficient death benefit then the whole policy will become useless. And if you do make a withdrawal or a loan against your policy, it would be deducted from the final payout. Which is why it is advised to make your decision carefully and speak to an insurance agent that can guide you better about your situation.