Can you cash in your life insurance policy?

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You can withdraw money from your life insurance policy, but first consider the pros and cons of doing so. / Credit: Getty Images/iStockphoto

Americans face tough economic conditions in 2022, driven by record inflation. The average household will pay $5,200 more this year for groceries, gas, heat, air conditioning and other necessities, according to Bloomberg. Additionally, a Pew Research Center survey found that 70% of Americans say inflation is a “very big problem” for the country.

Feeling the added strain of inflation on their finances, some Americans may seek economic relief and explore their options, including tapping into their life insurance policies for cash. Understanding the pros and cons of this strategy can help you determine if withdrawing money from your life insurance policy is right for you.

If you don’t have life insurance or want to increase the amount you currently have, you can start by getting a quote now.

Can I withdraw cash from my life insurance?

Depending on the type of insurance you have and your situation, there are several ways to access your life insurance cash.

Access a permanent life insurance policy

If you have a permanent life insurance policy, you may be able to tap into your policy’s cash value account. Whole life, universal life, and variable universal life are types of permanent life insurance policies that never expire and retain a cash value in addition to a death benefit.

In contrast, term life insurance is in effect for a limited time, such as 10, 20, or 30 years. The policy has a death benefit that pays the beneficiaries if the policyholder dies during the term. But one of the most important differences between whole life insurance and term life insurance is that the latter policy does not have a cash value account, so there is no money that policyholders can access.

It may be a good idea to withdraw money from your cash value account if you are in a strong financial position and your beneficiaries will be cared for after your death. On the other hand, if you have loved ones who depend on you financially, it’s probably not wise to remove the financial safety net that your life insurance provides.

Find out what type of life insurance you’re eligible for and how much cash you can potentially access by exploring your options today.

Surrender of your life insurance contract

This option allows you to withdraw the entire cash value of your life insurance policy, which in turn surrenders your coverage. You will receive all the money you paid for your coverage and any interest you earned. Your insurer also considers any outstanding loans or premiums on your account and you may also owe surrender charges and federal taxes.

Make a withdrawal

Another option is to withdraw money from your policy’s cash value account tax-free up to the amount you’ve already paid for your premiums. Any amount you withdraw that exceeds what you have already paid is taxable.

Borrow from your policy

Your policy may allow you to borrow against the cash value of your insurance policy. Getting a loan from your insurance policy can be easier than through a bank or credit union because there’s no credit check and more flexible repayment terms. But remember that any amount you owe on the principal and unpaid interest on the loan is deducted from the death benefit when you die.

Cover your policy’s monthly payments

If you need cash to cover your bills, you may have the option of tapping into your cash value account to cover the policy premium. This option can help you get through tough financial times and keep your policy in force. Remember that if you end up exhausting your cash value, your insurance could expire, ending your coverage.

What are the advantages and disadvantages of withdrawing money from a life insurance policy?

Weigh the pros and cons of getting cash from your life insurance to help you decide if it’s right for you.

Benefits of withdrawing money from a life insurance policyEasy process: policy loans do not require a loan application or credit check, as the cash value in your account serves as collateral on the loan. You can repay your loan on your own schedule and your payments are returned to your policy instead of going to a lender. Low interest rate: The interest rate you receive on a cash value loan can vary depending on whether your loan is fixed or variable. Typically, interest rates on life insurance loans range from 5% to 8%, which is much better than credit card interest rates and slightly better than personal loan rates. Of course, you won’t pay interest if you simply withdraw the money, but this reduces the amount of your cash value, which can take a long time to replenish. No credit impact: Taking out a mortgage or personal loan could cause a minor drop in your credit score. This is not the case with a life insurance loan since your eligibility is primarily based on the amount of your cash value, not your creditworthiness.

If you don’t have life insurance or want to see what your options are for using it for cash, getting started is easy.

Disadvantages of withdrawing money from a life insurance policy Lower death benefit: Withdrawing funds reduces the amount of your cash value and the death benefit of your policy. Similarly, any loan amount that you do not repay is subtracted from the death benefit. Withdrawing or lending may not be an option: You can’t access your whole life policy money unless your account has sufficient cash value, which takes time to build. If you need money soon after enrolling in your policy, you may not have the accumulated funds to borrow or withdraw. Rules for how much money you can borrow vary by insurer, but you can usually access up to 90% of your policy’s cash value. Your insurance policy may expire: when you repay a policy loan, you must pay interest on the amount borrowed. If you borrow a substantial amount and accrue interest that dwarfs your cash balance, your policy could expire and be closed by your insurer. In this case, your loan balance could be considered taxable income, leaving you liable for a potentially large tax bill. Alternatives to life insurance policy loans

If you don’t want to use your life insurance for money, consider these alternatives, which can get you the money you need without risking your coverage.

Personal loan: Depending on your credit, you may be eligible for a personal loan ranging from $100 to $100,000. Recent data from the Federal Reserve lists the average interest rate for a 24-month personal loan at 8.73%. You can review your personal loan options now. 0% APR introductory credit card: Paying no interest is attractive, but you need to be sure you can pay off the credit card balance before the introductory period expires and the interest rate interest reverts to its normal rate. Home equity loan: Home equity loans allow you to access the equity in your home for cash, but you will likely have to pay closing costs ranging from 2% to 5% of the loan amount. Learn about the potential risks of a home equity loan, including the risk of foreclosure on your home if you fail to make your payments.

Whether or not you decide to withdraw money from your life insurance policy, take steps to build an emergency fund that covers your living expenses for at least three to six months. A sufficient emergency fund can help cover a financial crisis without having to borrow money.

Have more questions about using your life insurance for cash? An online financial advisor can help point you in the right direction.

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