When times are tough, you may need cash to meet expenses. This is where life insurance with cash value comes in. It’s a financial safety net that you can fall back on when you need funds. However, it does come with its own drawbacks, including compromising on your future goals and finances.
Let’s learn more about how it works and how you can cash it in.
What Is Cash Value?
There are two types of life insurance: term and permanent. Only through permanent life insurance provided by a reliable company can you build cash value.
When you buy a permanent insurance policy, your premium goes toward the death benefit and a cash value account. This value grows at different rates, depending on your chosen policy. For example, whole life insurance has a fixed interest rate that helps the cash value increase. Universal life insurance, on the other hand, fluctuates depending on how well investments are doing.
Here’s How You Can Access Cash from an Insurance Policy
Permanent life insurance builds cash reserves through extra premiums and earnings. These deposits are added to an accumulation account that allows you to cash them through withdrawals, loans, or surrenders.
As this cash is yours, you can withdraw it whenever you want. All you have to do is call your insurance provider and tell them the amount you need. They will deposit the money in your bank account or wire you the cash. But doing so will reduce your death benefit. This means when you die, your beneficiaries will get less amount.
Pros and Cons of Cash Withdrawal
- Pro: There’s no interest to worry about
- Cons: Your cash value and death benefit are reduced
Can You Borrow Cash Instead?
Instead of withdrawing cash, you can always borrow it from your policy. A life insurance loan can be a quick and easy way to get some money to cover costs. Plus, they’re tax-free, and you don’t have to back them; the amount is simply deducted from your death benefit.
However, be careful when borrowing. You shouldn’t take out a considerable loan; it can affect your policy.
Pros and Cons of Insurance Loan
- There’s no credit check or loan application.
- The interest rates may be high.
- If not paid back, the loan will be taken from your death benefit.
Surrender the Policy
You can also surrender your insurance policy and take the cash payment instead. You’ll get the full cash value, but charges will be deducted. You’ll have to pay taxes on the gains you’ve earned and give up your policy.
This should be your last resort. Always try other options first, and then consider ditching your insurance policy.
A few options are:
- Reducing your policy’s value to decrease your premium
- Converting the policy using the cash value to keep coverage
- Using the cash value to pay your premiums for the time being
Pros and Cons of Surrendering
- Pros: If your cash/surrender value is more than the charge, you can get extra money
- Cons: Surrender charges can clear your cash value; you may have to pay taxes; No death benefit for beneficiaries
Can You Sell Your Policy for Cash?
If necessary, you can sell your policy to a third party who is willing to pay you a lump sum that’s more than your cash value but less than the death benefit. The buyer will proceed to pay the premiums, and upon your death, they’ll collect the benefit.
If you need cash immediately, this is the route to let go of life insurance. However, your chances of selling the policy are higher if you’re older. If a person is younger than 65 and want to sell a policy, they’ll have to show that they have a lesser life expectancy. This is because third-party buyers prefer purchasing policies with a lesser life expectancy.
Pros and Cons of Settlement
- Is a better option than surrendering your life policy
- There are many restrictions, and the cash offer is always lesser than the death benefit.
Work with Us
Are you looking for a life insurance agency that provides qualified burial and final expense insurance policies? Get in touch with us at Franklin Life & Annuity. We’re a Houston-based life insurance company that provides tailored life insurance solutions and plans to fulfill our client’s unique financial needs.
Our all-in-one final expense insurance protects your family’s financial stability when you’re dealing with the illness or death of a loved one.