One of the benefits of a cash value life insurance policy is that you can access the money while you’re still alive. There are several ways to withdraw money from the cash value, including surrendering the policy for a lump sum. here’s how it works and when it makes sense to give up a life insurance policy.
ways to access cash value in life insurance
If you have a permanent life insurance policy, it likely has a cash value component. there are several ways to access that money as a policyholder.
Reading: Surrendered life insurance policy?
You have the option to withdraw funds from the cash value portion of your policy. As long as you withdraw only up to the amount you paid in premiums (known as the cost basis) and not the earnings you earned, you won’t owe taxes. you can withdraw more than the cost basis, but be prepared to pay taxes on that portion.
A cash value withdrawal will reduce the death benefit your beneficiaries receive.
You can also borrow against the cash value of your policy. There is no loan application process or credit check involved because you are essentially borrowing from yourself. Interest needs to be paid, but rates are usually low.
If you die before the loan is repaid, the outstanding balance is deducted from the death benefit paid to your beneficiaries.
Waiving up a life insurance policy means canceling the policy and receiving its surrender value, which is the cash value less any surrender fees. if you follow this route, coverage ends. your beneficiaries will not receive a death benefit when you die.
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You will owe taxes on the amount you receive that is above the cost basis.
If you no longer want or need your policy, you can sell it to a third party in what is known as a life settlement. receive a one-time cash payment, often for more than the surrender value (more on this later). the buyer assumes responsibility for the policy, including paying the premium, and receives the death benefit when you die.
Life settlements are generally intended for older people who have health problems.
when to surrender your life insurance policy
Considering the many ways to access your cash value in life insurance, you may be wondering when it’s best to redeem your policy for cash. here’s a look at some scenarios where this might make sense.
you found a better deal
Although life insurance quotes rise with age and new health problems you develop, there’s a chance you could qualify for a cheaper policy today compared to when you first bought your current one. for example, perhaps your health has improved significantly or you have quit smoking.
In this case, it may be worth looking for a new one at a lower cost. make sure your new policy is in force before you turn in your current policy. Also, before you buy new life insurance, find out if a 1035 exchange could save you money on taxes.
cannot pay premiums
Permanent life insurance is significantly more expensive than term life insurance. If premiums take a big bite out of your income, you may be better off with a cheaper term life insurance policy. consider looking into term life insurance coverage to compare costs.
you no longer need life insurance
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There are some cases where you simply no longer need life insurance coverage. For example, if no one is financially dependent on you anymore, you may not need life insurance. it may not make financial sense to keep your policy in force.
need a lot of cash quickly
If you have a major expense to cover or perhaps a better investment opportunity, but you don’t have any liquid assets to tap into, handing over a cash value life insurance policy may be a decent option, especially if your real need is of life insurance has decreased.
how is cash surrender value calculated?
The surrender value of a policy is based on the portion of premiums paid into the cash value account plus the interest rate paid or investment earnings. from that, outstanding loans are subtracted, along with any surrender fees.
Some policies take many years to build up substantial cash value, so you may not have much cash value anyway.
Over time, ransom fees tend to decrease. ideally, you would wait until the fee is minimal or non-existent. Plus, the longer you have the policy, the higher the cash value portion is likely to be.
Also, remember that if your cash surrender value is worth more than you paid in premiums, you’ll owe income taxes on the difference.
Finally, please note that your beneficiaries will not receive a death benefit if you cancel your policy. So when exploring your options for cash value life insurance, consider how each method will affect your estate planning and long-term goals. there may be a better option if you need cash.
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