Should I Cash In My Life Insurance Policy? What You Need to Know

Life insurance is designed to provide financial protection to your loved ones after you pass away. But as life changes, so do your needs and priorities. You might be asking yourself: Should I cash in my life insurance policy? Or is life insurance something you should keep indefinitely?

Understanding when to potentially stop making life insurance payments and the options available for accessing your policy’s cash value can help you make a smart financial decision that aligns with your goals. In this article, we’ll explore everything from what happens at the end of a term life insurance policy’s term, to the various ways you can cash in a life insurance policy, and when it makes sense to do so.

Do All Life Insurance Policies Have Cash Value?

Not all life insurance policies are created equal, especially when it comes to cash value accumulation. Here’s a quick breakdown:

• Term Life Insurance: This policy provides coverage for a specific period, usually 10, 20, or 30 years. If you pass away during the term, your beneficiaries receive the death benefit. However, term life insurance does not build cash value. Once the term ends (the life insurance maturity date), the policy expires unless renewed or converted to permanent coverage. Because term policies generally don’t build cash value, you cannot withdraw cash from them.

• Permanent Life Insurance: These policies, including whole life, universal life, guaranteed universal life, variable universal life, and indexed universal life are designed to last your entire life and build cash value over time. A portion of your premiums accumulates tax-deferred and may be accessed during your lifetime through borrowing, withdrawing, or surrendering the policy.
  

Before considering cashing in, it’s critical to check your policy’s surrender value (the amount you’d receive if you cancel the policy) after deducting any fees or penalties.

When to Stop Paying Life Insurance Premiums or Consider Cashing In

Life insurance is a valuable financial tool, but there are situations when keeping your policy or continuing premium payments may no longer make sense. You might want to consider cashing in or selling your policy if you face any of the following:

1. Premiums Have Become Too Expensive

Permanent life insurance premiums can increase or become difficult to afford over time. If premium payments strain your budget, cashing in your policy or selling it through a life settlement can free up cash flow and relieve financial pressure.

2. Change in Health Status

If your health has declined or you’ve been diagnosed with a chronic or terminal illness since purchasing your policy, your life insurance may be more valuable on the secondary market. A life settlement can provide a significant cash payout to help cover medical bills, long-term care, or other pressing financial needs.

3. Depleted Cash Surrender Value

You might think there’s little cash left if you’ve already borrowed or withdrawn much of your policy’s cash surrender value. However, you may still qualify for a life settlement, which can unlock more value than surrendering or withdrawing alone.

4. Need to Boost Retirement Savings

Retirement often lasts longer than anticipated, and many worry about longevity risk–running out of funds. According to AARP: “No matter how diligently you’ve been saving for retirement, it’s hard not to worry about outliving your money. But you can take several steps to contain your expenses, manage your nest egg and invest wisely to help keep your savings from running dry”.

Selling or cashing in your life insurance policy can provide a lump sum to supplement retirement savings, helping maintain your lifestyle and cover unexpected expenses.

Ways to Access Cash from Your Life Insurance Policy

If you decide to access your policy’s cash value, it’s important to understand your options and how they affect your coverage and finances.

Withdrawals

You can withdraw funds from your policy’s cash value up to the amount of premiums paid, typically without tax consequences. Withdrawals beyond that may trigger income taxes. Keep in mind, withdrawals can permanently reduce your policy’s death benefit the amount paid to beneficiaries upon your passing. Some policies restrict withdrawals during the early years.

Policy Loans

Borrowing against your policy’s cash value is like taking a loan with your life insurance as collateral. Loans don’t require credit checks and usually have lower interest rates than traditional loans. You can repay the loan on your own schedule, but unpaid loans and accrued interest reduce your death benefit. If the loan balance grows too large, your policy could lapse, possibly triggering tax consequences in addition to ending the policy.

Surrendering the Policy

Surrendering means canceling your policy in exchange for the cash surrender value. This option ends your coverage and forfeits any death benefit for your beneficiaries. The cash surrender value is typically your accumulated cash value minus surrender charges, which decline the longer you’ve held the policy. Taxes may apply on any gains exceeding premiums paid.

Life Settlements

A life settlement involves selling your policy to a third party for more than its cash surrender value but less than the death benefit. The buyer assumes premium payments and collects the death benefit when you pass away. Life settlements generally offer the highest cash payout and greater financial flexibility, but the process requires careful consideration of fees, taxes, and eligibility.

Life Settlements vs. Other Cash Access Options: What’s Right for You?

When Should You Consider a Life Settlement?

Life settlements offer a valuable option when traditional cash access methods fall short. Consider selling your policy if:

• You no longer need your coverage but want to unlock its full cash potential. Many purchase life insurance for specific needs like supporting dependents or covering a mortgage. When those needs change, selling your policy can unlock far more cash than surrendering it.

• Rising premium payments are a financial burden. Premiums on permanent policies can become burdensome as you age or your health changes. Selling your policy can relieve this financial strain while providing a lump sum.

• Health changes increase your policy’s secondary market value. Chronic or terminal illnesses can increase your policy’s value to investors, resulting in a higher payout than surrendering.

• You need immediate funds for healthcare, retirement, or other expenses. Life settlements provide quick access to substantial cash, offering financial flexibility without dipping into savings or incurring high-interest debt.

• You want to avoid costly surrender fees and maximize your payout. Early policy surrender often comes with hefty fees. Life settlements typically pay more, making them a smarter financial choice when eligible.

What Happens at the End of Term Life Insurance?

Term policies typically expire at the maturity date. At this point, coverage ends unless you renew or convert to permanent insurance. Because term policies generally don’t build cash value, cashing in isn’t an option, but you may want to explore conversion if you still need coverage.

Should I Keep My Life Insurance After Retirement?

Whether you keep life insurance after retirement depends on your financial goals and family situation. Some keep policies to cover final expenses or leave a legacy, while others choose to cash in or sell policies to bolster retirement income.

If your policy no longer fits your needs, a free, no-obligation appraisal from a trusted life settlement company or advice from a financial professional can help you explore your best options.

Tax Implications and Penalties to Consider

Accessing cash through life insurance can have important tax consequences. Here are key points to keep in mind:

• Withdrawals and Loans: Withdrawals up to the amount you’ve paid in premiums usually are tax-free. Any amount exceeding that may be taxable as ordinary income. Loans are generally not taxable unless the policy lapses or is surrendered with an outstanding loan balance.

• Surrendering Your Policy: Surrender charges often apply, especially if you cash out early. You may owe taxes on the gains (cash value exceeding premiums paid).

• Life Settlements: The amount you receive above your policy’s cost basis is usually subject to ordinary income tax. Life settlements may also affect your eligibility for Medicaid or other benefits.

• Modified Endowment Contracts (MECs): These policies have special tax rules, and early withdrawals or loans may incur penalties similar to those on early retirement account withdrawals.
  

Because tax rules are complex and vary based on individual circumstances, it is essential to consult a qualified tax professional before making decisions about cashing in or selling your policy.

The Role of a Life Settlement Company: Your Trusted Partner

Navigating a life settlement transaction can be complex. A trusted life settlement company acts as your advocate and guide throughout the process:

• Navigating Complexities: They handle the legal, financial, and administrative requirements, so you don’t have to worry about paperwork or compliance.

• Protecting Your Privacy: Your personal and medical information is handled confidentially and securely.

• Clear Communication: They provide straightforward explanations of your options, expected proceeds, and any associated costs or tax considerations.

• Managing Buyers and Transactions: The company works with multiple buyers to get you competitive offers and manages all transaction details to ensure a smooth closing.

Having a knowledgeable, ethical settlement company by your side ensures your interests come first.

Ready to Get Started with a Life Settlement?

Unlock the cash value of your life insurance policy in just a few simple steps:

1. Request Your Free, No-Obligation Appraisal
   Contact us to receive a complimentary evaluation of your policy’s worth, no strings attached.

2. Compare Multiple Competitive Offers
   We work with multiple licensed funds to provide you with various options, helping you find a competitive offer based on your policy.

3. Review All Terms Carefully
   We’ll help you understand all fees, taxes, and contract details so you can make a fully informed decision.

4. Complete the Sale and Receive Your Cash
   Once you accept an offer and sign the necessary paperwork, you’ll typically receive your payment within a few weeks. After the sale is complete, the buyer will assume responsibility for the premium payments, and you’ll be free from any future obligations related to the policy.

Take the first step today! Get your free estimate and discover how much your policy could be worth.

Is It Time to Cash In Your Life Insurance Policy?

Cashing in your life insurance policy is a significant decision with long-term financial implications. Before proceeding, ask yourself:

• Do I still need this insurance coverage? If yes, consider alternatives that preserve your benefits.

• How will cashing in affect my beneficiaries’ financial security? Will they have enough support without this policy?

• Have I explored other financing options? Loans, home equity, and partial policy access might better suit your needs.

• Am I aware of the tax, penalty, and financial consequences? Professional guidance is invaluable here.

Ready to see what your life insurance policy could be worth?

If your coverage no longer fits your needs or your financial goals have changed, a life settlement might be the smarter move. Start with a free, no-obligation estimate and explore your options with clarity and confidence.