Cash In a Life Insurance Policy

Life insurance helps protect those you love.

If you have a term life insurance policy or are considering purchasing one, you should understand how to cash in an insurance life policy so when the time is right you are ready to take advantage of the opportunity. Before learning about the process, it is important to understand the different types of life insurance available to protect you and your family.

Life Insurance

Life insurance is important because it gives your dependents or beneficiaries financial security after you die. It is very simple. You pay monthly and/or yearly premiums to your insurance company. After you die, they pay your beneficiary a death benefit, often income-tax free. If you are the primary income contributor, life insurance enables your spouse and children to continue living in their current life style after you have died.

There are two basic types of life insurance:

  1. Term Life Insurance is good for a set amount of time, often one to thirty years. You can opt to renew your policy. There is no cash value to term life insurance and there is no way to "cash in".
  2. Permanent Life Insurance is more of a long term, investment opportunity. When you pay your premium, your money goes into a cash reserve and accumulates. Though each policy differs in its terms, unlike term life insurance, you can cash in an insurance life policy early if you are ready.

Permanent Life Insurance

Permanent life insurance is good until either the policy owner dies and it pays out, or the owner fails to pay a premium and forfeits the policy. Whole life insurance is a type of permanent life insurance which can pay out. There are numerous benefits to holding this policy including:

  • Favorable tax treatment; you are not required to pay taxes on the earnings generated within the policy as long as the policy remains in force
  • Ability to take loans against the policy; these are often taken tax-free
  • Accumulation of a cash value on the policy, which can in turn be used towards education, retirement, or other expenses as needed
  • Premiums remain the same, unlike term insurance where they increase with age
  • Create a cash value on your policy
  • If you decide to cancel, you are not out your complete investment because you have an accumulated cash value (minus any surrender charges)

Cash in an Insurance Life Policy

There are different reasons you may consider getting ready to cash in an insurance life policy. Though you do not need to have a specific reason in mind when withdrawing funds, most policy owners set up permanent life insurance knowing that they have it for extra padding or as a "financial" insurance policy to tap into while still alive.

Some examples of different reasons you may cash in an insurance policy are:

  • Your child is getting ready to begin college and you want to help pay for his education.
  • Your children are older and no longer need the financial support the policy would provide.
  • You have unexpected medical expenses you need to pay for.
  • You want to retire and your beneficiaries are already financially set.
  • You want to purchase a home or make another investment that you will pass onto your beneficiaries.

Penalties

Now that you are ready to cash in an insurance life policy, you need to understand the penalties. Cashing in is more like borrowing, or taking out a loan, against your insurance policy. When you choose to go this route, you are decreasing the original payout when you die.Some insurance companies ask you pay back the loan with interest. If you do not choose to pay it back, the money you owe plus interest is deducted from the final benefit.

Before cashing in, take a look at why you created this policy. Some things to consider are:

  • Will the final payout be enough to protect your family in the event of your death?
  • Will cashing out create taxable income?
  • What penalties does your insurance company have in place for early withdrawal?
  • When your policy is paid off, is there a better place you can invest the money that is sitting in your account?
  • What was your original intent of your life insurance policy? Does this same reason exist?

Selling Your Policy

Another way to cash in an insurance life policy is to sell it. However, seller beware. There are only a handful of companies that legitimately purchase life insurance policies from those who no longer need them. Life insurance policies are a smart investment if you want to leave behind financial security for those you love. Research your different options to find which policy is best for you.

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Cash In a Life Insurance Policy