Let’s Begin With Understanding What Is Cash Value of Your Life Insurance Policy and How Valuable It Is
When you are paying the life insurance premium for a long time, there could be a time when due to money constraints this could become a burden. As the benefit of this policy can only be availed after death, it can be a good option to cash out your life insurance before death. Though it may at times be a necessity due to unexpected financial problems or just merely to invest in something else, there are several ways you can cash out your life insurance policy.
The factors like if you still want to keep the policy, the full or partial amount you want to cash out and various others are dependent on how to cash out your life insurance policy. The savings element in the life insurance policy is the ‘cash value’ it holds. When you pay premiums to the insurer, overtime savings build up. The money however cannot be just taken out on a whim. There are terms and conditions that apply when you want to access your policy’s savings.
Below are 4 options to consider when you want to cash out your life insurance policy.
A Life Settlement Company
In this option, you can sell your life insurance policy to a life settlement company. The company will purchase the policy in return for an agreed amount of money. By using the help of a life settlement broker you can even get an amount that is higher than the actual value of the policy. With this transaction, the company that is buying the policy will become the beneficiary. They will continue to pay the premiums on the policy and in case of death, they will receive the benefits and proceeds from the policy.
Choosing To Take Cash
Your life insurance policy builds up cash over time. This is due to the combination of premiums and earnings on the policy. The money is accumulated in the account as per the particular plan you have. You have the option of withdrawing cash from the policy then. The limit set will be determined by the insurer who will take into consideration the type of life insurance policy you have. However, there are a few drawbacks when you choose this option. It could reduce the death benefit and you may also be subjected to tax penalties upon withdrawal. To maintain the same death benefit, you may end up paying higher premiums.
Taking A Loan
Some cash value life insurance policies give you a chance to loan money and act as a form of collateral. The loan will accrue interest as per the terms of the policy. The total cash that you can take as a loan and which you can qualify for will be determined as dictated in the terms of the policy and the cash accumulated in the account. The best benefit of using this option is that you are exempted from making monthly loan repayments. As the interest is accrued and the cash value of the policy decreases, you only need to pay the minimal premiums to maintain the death benefit. The only drawback with this option is the same as when you take the cash option. It reduces the policy’s death benefit and in case you are unable to pay the monthly premiums the policy can lapse.
Surrender Of The Policy
In some cases, you can cancel or surrender your life insurance policy and get the cash in return. This can be done in the early years of owning it. The cancellation fees will however lower the cash value that you will receive. This is not always an option available with all insurance providers and it varies on different company policies. You may also have to pay the taxes that are connected with the policy as well as lose the death benefit connected to the life insurance you have taken.
Diligently Do Your Research
When you take a life insurance policy, there may be many reasons but the main one is to put up a security net for your loved ones that will take care of them financially if something were to happen to you. While there may be some possibilities wherein you will be short of money and will need to cash out your life insurance policy, it is better to think it through. Research on all the options you have and see which will give you the best financial gain. Take help from professionals if the terms and conditions are not clear to you.