Options for Cashing In Your Life Insurance Policy

If you are in dire need of financial assistance, it may be unwise to shackle yourself to costly, monthly life insurance premiums. Sometimes, it is prudent to stop paying premiums and figure out how to get cash from your policy, instead of continuing to dump cash into it. As is the case with any important decision, it is essential that you are clear about what you want to accomplish—what is your goal?  If your goal is to provide a death benefit from your life insurance policy for a loved one, then think long and hard before you stop investing in this policy.  However, if your time horizon is more immediate, then it makes sense to explore the best way to use your life insurance policy to free up as much cash as possible.

There are several ways to access the cash surrender value embedded within your life insurance policy. Cash value life insurance policies were designed to accommodate this eventuality.  These policies accumulate reserve money through excess premiums.  The premium includes an excess amount that the insurance company transfers to a cash accumulation account (In other words, there is a savings account feature inside your insurance policy). This kind of policy is designed so the policy owner may withdraw cash from this policy in order to meet an urgent financial need. The typical way to access the cash in an insurance policy is to take out a policy loan or to surrender some (or all) of the death benefit.

Before you make a decision to pull cash from your policy, weigh your options. Choosing a poorly suited method for cashing in your life insurance policy can result in serious ramifications. For example, the more cash you withdraw, the more you lower the available death benefit. Furthermore, if you are not careful, you may end up having to pay income tax on your life insurance policy cash withdrawal. This happens when the amount you withdraw supersedes your basis in the policy. Another possible unwanted side effect when you decrease the cash value account in your policy is a possible increase in your policy premium in order to prevent your policy from lapsing.

Usually, an insurance owner is entitled to withdraw specific amounts from their life insurance policy. The allowed withdrawal amount is contingent on the type of policy that has been taken out, as well as the insurance company that issued the policy. When done properly, cash value withdrawals are not considered taxable income.

A policy loan is an alternative to a cash withdrawal from the policy. In such cases, your personal account functions as a form of collateral. The loan amount available is not arbitrary. The amount you can borrow hinges on the amount of funds available in the policy’s cash accumulation account and the terms of the policy. This type of loan can be very helpful because it is not subject to taxation. Also, you are not required to make a loan re-payment.

Loans and withdrawals enable you to seek immediate, financial assistance, while still retaining certain elements of your life insurance policy and death benefits.

However, if you are looking for the ultimate opportunity to cash in your life insurance policy, your choice probably narrows down to the choice between surrendering your policy and selling this policy in what is known as a life settlement transaction.  Each of these alternatives eliminates the need to pay additional premium payments, while putting cash in your pocket.  Typically, you will get considerably more cash by selling your insurance policy to an investor than you will get by turning in the policy to the life insurance company that issued the policy.

Life Insurance Vs Life Assurance

People spend a lot of money on complicated financial products and it is sometimes difficult to keep track of what products perform what tasks. Many people are not aware of all the financial products that are available or they only know of them vaguely. They may not know how much they cost or the potential benefits they offer. How can consumers make informed decisions on what products they would be willing to buy if they do not have this basic information? This problem can often lead to consumers buying unsuitable of overpriced products simply because they feel they should have some financial protections available but don’t have the details to make an informed choice.

One of the common questions many consumers have is regarding the difference between insurance policies and assurance policies. Put simply, insurance policies cover the costs of an event that might happen while assurance policies will pay out on the occurrence of an event that is certain to happen. Insurance policies only last for a specific period of time. If the event occurs within that time, they pay out, otherwise they are finished. Therefore, if no claim can be made within the term of the policy, they have no remaining value.

Guaranteed Payout

An assurance policy is different. Assurance policies always pay out. For example, a life assurance policy will generally pay out upon death or upon reaching the age of 65. How does this policy work? Well, they combine two elements; an insurance element, which will pay out if, the person dies early. This will then be used to pay for the funeral or support his family. But then there is another payment made every year and this is the investment portion. The insurance company invests this part of the premium on behalf of the policyholder and when they reach the age of 65, they pay this out. Life assurance policies are therefore often used both as a method of life insurance and as a method of saving for retirement.

Do You Need Money Now?

If you wish to cash in the investment portion of a life assurance policy early this is generally possible. However, there will usually be hefty penalties added to this so it is inadvisable to cash in early if you don’t have to. The distinction between insurance and assurance is also becoming more blurred as more companies offer both types of policy or add features of one type of policy to their other type to make them more attractive. The distinction is still important so that you know what to ask for and know what kinds of facilities are available for insuring your life and providing for your future.