How Does a Life Insurance Policy Cash Out Work?
Cashing life insurance means taking some or all of the accumulated cash value. There are several options based on whether you want to keep the coverage. The following are the primary options:
Giving Up the Policy
Surrendering a life insurance policy involves canceling the coverage and receiving the surrender value in exchange. This is equivalent to the cumulative cash value less any surrender charges you may owe. The policy no longer exists at this time, which means that your named beneficiary or beneficiaries will not get any death benefits if you die. Remember that if you get more cash value than you paid in premiums, you may be required to pay capital gains tax on the difference.
Life Insurance Settlement
An alternative to relinquishing your policy is a life settlement. You sell the policy to a third party under this agreement. The insurance still insures you, and the new policy owner receives the death benefit when you die. In the interim, you can sell the policy for cash and no longer have to pay premiums.
Obtain a Loan Against the Cash Value
If you want to keep your policy, you can take out a loan against its cash value instead. The advantage of this option is that borrowing from life insurance may be easier than obtaining a personal loan or line of credit elsewhere.
The loan must be returned with interest. However, your life insurance provider may allow some repayment flexibility. If you do not repay the loan, the amount will be removed from the death benefit awarded to your beneficiaries after you die.
Withdraw Money
If you want to keep your coverage, another option is to withdraw cash. You’re just taking money out of cash value rather than borrowing it. Therefore, there’s nothing to repay. However, this, once again, diminishes the death benefit accessible to your loved ones. This option may or may not be subject to a partial surrender charge by your insurance company.
Request Living Allowances
You could withdraw money if your policy has an accelerated death benefit rider or a provision for living benefits. You should consider this if you have a terminal condition and need money for medical bills or day-to-day living expenditures. Anything you withdraw reduces the final death benefit awarded to your loved ones.