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Can I Cash Out a Whole Life Insurance Policy?

Whole life insurance is a versatile financial tool that can provide added protection for your loved ones. If you pass away, your loved ones can help replace some of your income or save for the future using your policy’s death benefit payout. Plus, its cash value growth component can offer a wealth-building opportunity. It can grow with each payment, earning tax-deferred interest. Additionally, there are some ways you can tap into your cash value once it’s large enough. Let’s dive deeper into how cashing out a whole life insurance policy works.

How to cash out whole life insurance

There are several ways to cash out whole life insurance. Ensure you consult your tax advisor because each one varies in benefits, drawbacks, and potential tax consequences:

Take out a policy loan

Whole life insurance lets you borrow at low rates with no credit check or fixed repayment date. In some cases, you may not owe taxes on borrowed amounts, and your death benefit doesn't decrease. This offers a flexible way to access extra cash for various purposes.

However, interest accumulates on your outstanding balance. If the balance exceeds the cash value, your policy could lapse. This may result in a taxable event since you don’t have to repay a loan on a canceled policy.1 Therefore, careful management of the loan is critical.

Withdraw funds

Policies also let you withdraw cash from the policy to avoid having to repay a loan. However, withdrawing cash value interest gains or withdrawing more than your total premiums paid may result in tax consequences.1

Surrender your policy

If you no longer need coverage or don’t want to continue paying premiums, you can simply surrender the policy to terminate the policy and receive the cash value. Depending on when you surrender, you may have surrender charges deducted from the cash value. These decrease with time, and if you surrender late enough, you may not owe surrender charges.

Just like with other methods, you may owe taxes on interest earnings you receive by surrendering the policy.1 For example, if you receive a $20,000 cash value payout, and $2,000 is from interest, you may owe taxes on that $2,000. You may also owe taxes if you receive more than the cost basis or had any outstanding loans when you surrendered the policy.

Sell your policy

Another option for getting rid of your policy is to sell it, which is called a life settlement. Selling requires more work but may result in a larger payout than a policy surrender. In general, you must sell your policy to a licensed life settlement company. These companies exist to purchase life insurance policies and receive the death benefit when the policyholder passes away.

To get a life settlement, you can research life settlement companies to find some reputable options and apply to each one. Underwriters at each company will evaluate whether your policy is a good investment and may provide you with an offer. You can then pick the best offer, finalize the details, and sign the documents to transfer the policy to the life settlement firm.

Since the process is more complicated, you can hire a life settlement broker to handle the complex parts of the process. Furthermore, you may owe taxes on some of the proceeds, depending on the settlement amount.1

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Is there a penalty for cashing out whole life insurance?

There is no penalty for cashing out whole life insurance because these policies are designed to offer the opportunity to build wealth. However, surrendering the policy may result in surrender charges if done before a specified date. Additionally, you may face tax consequences for withdrawals, loans, and policy surrenders depending on the amounts received and cash value growth.

When should I cash out whole life insurance?

Many advisors generally recommend waiting at least 10 to 15 years to cash out your whole life insurance policy.2 The policy must grow large enough for you to access it without causing problems for your coverage.

Even if you’ve waited for several years, cashing out the policy is not always a good idea. Consider whether you still need the same amount of life insurance coverage and the potential tax consequences before making your decision.

Alternatives to cashing out a whole life insurance policy

Although cashing out a policy can provide significant funds, the downsides may not be worth it in some situations. Here are some alternatives to consider if you need access to funds:3

  • Home equity loan or line of credit: Home equity loans let you tap into your home equity to borrow large amounts and good repayment terms. Home equity lines of credit are similar but offer more flexibility. Either of these can work well for homeowners with significant equity who need help covering large goals, such as their children’s college or home improvements.

  • Personal loans: Personal loans let you borrow up to tens of thousands of dollars for any purpose. They may help you borrow funds without drawing on a life insurance policy.

  • Retirement accounts: If you’re approaching retirement, some of your retirement accounts may let you start withdrawals. For instance, 401(k) accounts let you start withdrawing at age 59½.4

  • Non-retirement investment accounts: If you invest within a taxable account, you could sell assets anytime and withdraw funds to cover any necessary expenses. You may owe taxes, but potentially at favorable long-term capital gains rates if you held the sold assets for over a year.5

Learn more about whole life insurance

Cashing out your whole life insurance can offer substantial financial assistance for various purposes, from covering unexpected expenses to accelerating your progress toward financial goals. However, it’s important to be aware of the potential tax consequences and other considerations. Now that you understand the benefits and risks of cashing out your policy, speak with an Aflac agent to learn more about our life insurance policies and get a quote.

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