YOU ASK:

Can you use your life insurance policy if you need cash?

WE ANSWER:

You can cash in your life insurance policy if it is a permanent policy.  Permanent policies have cash value components that may be able to serve you in your time of need. If what you have is a term life insurance policy, then you cannot use it if you need cash.

When am I allowed to keep the cash value of my insurance policy?

Insurance policies with cash value components are required to indicate the method employed in the computation of such values. These policies are also required to provide a status of the cash value available at the end of the year in each of the first twenty years of a policy.

If your policy has accumulated enough funds, you may take out a loan or withdraw the amount. In many cases, growth in cash value kicks in after a few years. Hence, you need to check with the insurance carrier as to when you can access the fund.

How do I cash in my life insurance policy?

  1. First, confirm that your policy has a cash value component. If you are not sure check your policy contract, or, get in touch with the insurance company.

    Be aware that cash-value policies do not normally register significant amounts in the first three to five years of the policy's term. If there are, the actual amount would still be subject to deductions for commissions and fees.

  2. Determine the actual amount of cash value you have from the insurance company. Inquire what the interest rate is if you opt for a loan.

  3. Decide whether you want to withdraw or take out a loan. Be aware that withdrawals and loans have different impacts on your policy. Most experts agree that withdrawals should not be resorted to if this creates income that may be subjected to tax. This happens when the cash value is greater than the total premiums paid.

    If you consider taking out a loan, ask what the interest rate is and compare it to other financing options available.

  4. Ask the insurance agent or representative about the succeeding steps and the charges you will have to shoulder to get your funds.

  5. Await for your funds to arrive. Usually, it will receive it in the same manner you make your premium payments – by check or via automatic debit.

Do I have to pay taxes if I cash in my life insurance policy?

If you cash in on your permanent life insurance policy, you will owe income tax if the cash you took out is greater than the total amount of premiums you paid. For example, if you withdrew $15,000 and your total premium payments amounted to $10,000, the $5,000 difference will be subjected to tax.

If you took out a policy loan, the money you get will not be subjected to tax as long as the policy remains in force.

How long does it take to cash in life insurance?

While insurance companies have the right to delay the release of the cash value payment for up to six months, they do not usually do so. Normally, processing will take the company 7 to 10 days.

Is it better to cash out your life insurance policy than to make a loan against it?

Generally, withdrawals are not recommended especially if the pay out will be subjected to income tax. It is also not recommended when the policy is still in its early years as the pay out amount would be quite small. You may consider a cash out withdrawal if you think you do not need the policy anymore or you feel that your tight budget cannot keep up with the payments.

A loan would be a better choice if you still want to keep the policy.  However, you would need to continue making premium payments. Also, you may not be required to repay the loan and you may owe interest on the loan amount. The downside here is that the amount loaned to you will be deducted from the policy's proceeds when they become due.

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