How to Get Cash Out of Your Life Insurance Policy

Whether you’re in a tough financial spot or you just want to access the cash in your life insurance policy, there are many ways you can do it.

Unfortunately, not all life insurance policies have a cash value you can access.

Only certain types of policies have this feature.

Here’s what you need to know about accessing the cash in your life insurance policy, if you have any. 

As always, consult a professional before making any decisions regarding your unique situation. Taking cash out of life insurance is a serious decision with many consequences.

What is Cash Value?

Cash value is a component of some types of life insurance policies. 

In policies that have this feature, part of the premiums you pay goes toward cash value. The cash may earn interest over time and grow over the life of the life insurance contract. 

The cash value isn’t always necessarily cash.

Certain types of policies allow you to choose to invest your cash value in specific ways. This can help the cash value of your policy build faster.

Building cash value

Early on in the policy, you may have no or very little cash value. Amounts of cash available are typically higher with more seasoned policies. 

This happens because you’ve been paying premiums that go toward building that cash value longer.

In many cases, the cash value you build in your policy disappears when you die. Your beneficiaries don’t receive it. 

There are riders, or add-ons, to insurance policies that could pass the cash value on to your beneficiaries in some cases. 

If you don’t have one of these riders, it may make sense to access your policy’s cash value when you need it.

Impact of accessing cash value

Taking cash out of the cash value or failing to repay a loan against the cash value could lower the death benefit paid to your beneficiaries.

Furthermore:

Accessing the cash value early could leave you without a similar option to access cash later in life. 

You’ll have to read your policy closely to see how the cash value in your life insurance contract works.

What Types of Life Insurance Have Cash Value?

In general, only some permanent life insurance policies have the potential of having a cash value component. 

Cash value life insurance policies could include: 

• Whole life insurance
• Universal life insurance
• Variable life insurance
• Variable universal life insurance 

Look at the details of your life insurance policy. Then, you can see if it includes a cash value or investment component.

What Kinds of Life Insurance Don’t Have Cash Value?

Not all life insurance policies offer a cash value option.

For example, term life insurance doesn’t have a cash value component. 

This makes sense when you consider the amount of money you save.

After all, term life insurance usually comes with lower premium payments. 

There isn’t any extra money built into the annual premiums you’ve paid to fund a cash value account. The monthly payments only cover the cost of providing the death benefit a term life insurance policy offers.

5 Ways to Access Your Life Insurance’s Cash Value

The ways of accessing your cash value could vary depending on the rules of your specific policy.

Read your life insurance contract to know how your policy works. 

The amount you receive may differ based on your policy’s cash value and the option you choose.

Here are a few potential options that may work depending on your situation.

1. Borrow against the cash value

The cash value part of your life insurance policy is often considered an asset you can take a loan out against. By borrowing money from your insurer, you get access to the cash value while leaving it in the policy.

This type of loan is convenient since the collateral is already in the hands of the insurance company.

Due to this, you may receive a favorable interest rate. You may also avoid credit check requirements. This is much less restrictive compared to taking out a standard loan with a bank.

That means:

The amount you borrow will incur interest charges until you repay it or you die. 

If the interest charges ever put the amount owed above your policy’s cash value, the policy could lapse. This could cause unintended tax consequences and leave your beneficiaries without a death benefit.

Any outstanding loan balance at your death may cause issues. 

The amount owed, including interest charges, may be deducted from death benefit payments if you die before you repay the loan. The amount removed could be higher than you’d expect.

2. Use it to pay your premiums

Those in a challenging financial position may need to pay the bills. One of those bills is your life insurance premium.

In certain situations, you may be able to quit paying life insurance premiums and convert to a paid-up policy. 

Read your policy first and make sure you understand precisely how this works. Different policies may work in different ways.

Do not quit paying premiums until you have completed the necessary paperwork.

Essentially, this stops your premium payments and uses the remaining cash value to settle your future life insurance premiums. 

The downside:

This could reduce your death benefit significantly.

The insurance company will calculate the death benefit your current cash value can support. 

If you choose to convert to a paid-up policy using your cash value, your death benefit will be reduced to the agreed-upon amount.

3. Withdraw some of the cash value

Withdrawing some of the cash value seems like an easy solution to get the cash you need.

Unfortunately, it can have many unintended consequences.

Withdrawing money from the cash value could reduce the death benefit or increase your premiums.

One thing to consider when taking cash out of life insurance is the tax impacts. These can be complex, so it’s best to talk to a tax professional before doing this.

In some cases, the money you withdraw could be taxable.

If you have certain types of policies, you may even have to pay an early withdrawal penalty for withdrawals made before age 59.5.

That said:

The money is often tax-free as long as the cost basis, or the premiums you’ve paid, exceeds the amount you take out. 

However, you may have to pay income taxes on the additional amount if you withdraw more than the total premiums you’ve paid.

4. Surrender your policy and take the cash

Surrendering your policy is a fancy name for canceling it.

When you do this, the life insurance company pays out any cash value you’ve accumulated.

Now:

Many life insurance companies build surrender charges into their policies. Essentially, these are fees for canceling your life insurance. It reduces the amount of money you receive.

Surrender fees are often higher earlier in your policy and decrease as you hold it longer. This is because life insurance companies have more time to recoup your policy’s costs over more extended periods.

Some policies have charts that describe exactly how much cash you can get for surrendering your policy at a given moment. More complicated policies with investments may require calculating the number. 

Ask your life insurance agent for the cash value of your policy. This way, you can see exactly how much you could receive. 

In addition to the cash value, ask to see the surrender fees you’ll be charged. Only then can you understand how much money you could receive. 

Verify the net cash surrender value, which is your cash value less any surrender or other fees, with your policy documents, if possible.

5. Sell your policy

Your policy may allow you to sell it to a third party. The other person or company pays you a negotiated amount. Then, you sign the policy over to them.

The new owner holds the policy and receives the death benefit when you die.

The real advantage:

The new owner also has to pay the life insurance premiums.

In some cases, selling your life insurance policy may provide more money than other options. 

The downside is you no longer have life insurance. Your former beneficiaries won’t receive a death benefit when you die, either. 

Other names for this are a life insurance settlement or viatical settlement.

Consider Consulting an Expert to Examine All of Your Options

Before you make any financial decisions, consider running them by an expert.

While life insurance agents are life insurance experts, they may not always be on your side.

Their pay structure incentivizes them to sell you insurance and keep the policies in place since they get paid commissions.

Instead of visiting a life insurance agent, consider paying a fee-only fiduciary financial advisor to take a quick look at your situation and offer their advice. 

These experts are paid by you, not commissions. Their advice isn’t conflicted. In fact, fiduciary advisors must offer advice that is in your best interests.

Final Thoughts

Only you can determine if accessing your life insurance’s cash value is a good idea for your situation. 

Taking cash out of life insurance policies may seem tempting, but it could impact you and your beneficiaries in many ways.