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How to Cash Out a Life Insurance Policy?

If you’re in need of cash to help cover your bills or pay for an emergency expense, you may be wondering if you can cash out your life insurance policy. Fortunately, you may be able to do so, depending on your policy type. Read on to learn how you can use your cash value to receive funds from life insurance.

What is life insurance cash value?

Cash value is a feature that comes with permanent life insurance policies like whole life and universal life insurance. If you have cash value life insurance, you’ll pay a portion of your premium toward insuring your life and another portion toward building up the cash value. The cash value may earn tax-deferred interest.1

Can you cash out life insurance?

As long as you have a permanent life insurance policy, you may be able to tap into its cash value account. Whole, universal, and variable universal life insurance are all examples of permanent life insurance policies that will cover you for life and allow you to maintain cash value as well as a death benefit.2

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Ways to take out cash from your life insurance policy

There are several ways you can use the cash value from your life insurance policy while you’re still alive, including:

Borrow from your policy

Depending on the specifics of your policy, you may be able to take out a loan against the cash value. Since there is no credit check involved and the repayment terms are flexible, you may find it easier to get a loan from your insurance policy than from a bank, credit union, or online lender. If you go this route, keep in mind that any amount you owe on the loan will be deducted from the death benefit.

Withdraw funds from your policy

You may also be able to withdraw a portion of your policy’s cash value. In many cases, you won’t owe income tax on any withdrawals you make up to the amount of premiums you’ve already paid. However, any amount you withdraw that exceeds what you’ve already paid will likely be taxed.

Surrender your policy

If you decide to surrender your policy, you withdraw its entire cash value. This will end your coverage, and your beneficiaries will no longer be owed a death benefit when you pass away. In addition, you might be on the hook for a surrender charge or owe income taxes if your payout is higher than the premiums you paid.

Pay policy premiums using your cash value

Your cash value can help you out if you need money to pay your life insurance premiums. You may use it to cover out-of-pocket premium payments. This option might come in handy if you’re struggling financially.

Pros and cons of cashing out on life insurance

The most noteworthy benefits and drawbacks of cashing out your life insurance policy are as follows:

Pro: Receive quick funds

You won’t have to go through an extensive application process or a long waiting period to collect your money. Life insurance loans offer quick funding because there is no application or credit check. The cash value in your account acts as collateral on the loan, and you can take advantage of it once you’ve built up enough.

Pro: Low interest rates on loans

Typically, you can lock in a low interest rate on a cash value loan. Depending on your policy, this may be anywhere from 5% to 8%.3 These interest rates are much lower than rates on many credit cards and personal loans.

Con: Reduce or eliminate your cash value

If you cash out your life insurance policy, you’ll lower your cash value or get rid of it altogether. Plus, any loan amount you don’t repay will be deducted from the death benefit.

Con: Your policy could lapse

When you pay back a life insurance policy loan, you will face interest charges. In the event you borrow a significant amount and your interest exceeds your cash balance, your policy might lapse, and your insurance company may close it. You will then be stuck with a hefty tax bill.

Do you pay taxes when cashing out a life insurance policy?

Fortunately, you won’t have to pay taxes if you withdraw up to the amount of the total premiums you paid into the policy. However, if you withdraw any gains or dividends on the policy, these amounts may be taxed as ordinary income.4

Should I use the cash value of my life insurance policy?

If you need to borrow funds for short-term needs, like a home improvement project or wedding, it may make sense to cash out your life insurance policy. This is particularly true if you’re confident you can pay back the loan and don’t mind a smaller death benefit for your beneficiaries.

Learn more about cash value life insurance

Aflac offers whole life insurance that comes with cash value. You can reap the benefits of the cash value component while you’re still living, whether you want to withdraw funds or get a loan. If you’re interested in a whole life insurance policy with cash value, get a quote today.

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