What “cashing out your life insurance” does and doesn’t mean
Can you get money from your life insurance policy if you’re still alive? In some cases, the answer is yes.
But keep in mind that we aren’t talking about the full stated value of the policy. In other words, if you’re covered by a policy worth $25,000, you can’t “cash out” your life insurance and get $25,000. That amount is called the “death benefit” and can only be collected by your beneficiaries after you’re gone. (An exception is if the person covered is suffering from a terminal disease and has only a limited time left. In that case, the insurance company will sometimes allow a partial payment of the death benefit before death to help with end-of-life expenses.)
The money you may be able to get while you’re alive and well comes from what is known as your policy’s “cash value.” But not every life insurance policy builds cash value.
Does my life insurance have cash value?
Every time you make a payment on certain types of life insurance, the insurance company takes a portion of your payment and puts it aside. Over time, that fund gets larger and earns interest and becomes the “cash value” of your policy. How much is the cash value worth? It all depends on the amount of your monthly premium and how long you have been paying into your policy. Often, it can add up to hundreds or thousands of dollars.
The important thing to note is that cash value only accumulates in “whole life,” “universal life,” and other “permanent” life insurance policies. They are the policies that cover you for the rest of your life, no matter how long you live.
It’s a different story if you have a “term life” policy. Term life is designed to cover you for a specified period (say 10, 15 or 20 years) and then end. Because the number of years it covers are limited, it generally costs less than whole life policies. But term life policies typically don’t build cash value. So, you can’t cash out term life insurance.
Options for cashingout a life insurance policy
- Option 1: Withdraw your entire cash value. Let’s say you have a whole life policy you have been paying into for a while and you want or need money. One option could be to cash it out entirely, which would get you all the cash value you have built up, but which requires that you surrender your policy—so the coverage you wanted for loved ones will end. Generally, you will have to pay “surrender charges,” which can add up, especially if you’ve only had your policy for a few years. And you’ll also probably have to pay income taxes on the money.
- Option 2: Make a partial withdrawal. Another option may be to take some but not all the cash value of your life insurance policy. The benefit here is that you don’t have to surrender your policy, which means your loved ones will still get a death benefit when you die, although probably a smaller one than you intended for them. In this case, check to see whether or not the money you’d receive would be taxable.
- Option 3: Borrow money from your life insurance. If you’ve had your life insurance policy for several years, the insurance company will often allow you to borrow from your policy’s cash value. In most cases, you won’t have to pay taxes on the money you borrow, but the insurance company will deduct interest payments from your cash value balance. On the plus side, the interest charge can be at a lower rate than you’d pay on a credit card or bank loan, and the loan does not count toward your credit score. If you pay back the loan and interest in full before you die, your loved ones will get the entire death benefit. But if you die before the loan is fully repaid, the balance you owe, plus interest, will be subtracted from the death benefit.
Is cashing out your life insurance policy right for you?
Cashing in or borrowing from your life insurance policy may be an option. But be sure to read over your policy contract to see if and how it works and find out if you will have to pay charges and taxes on the money. If you’re not clear on your options, ask your insurance company representative for help.
FAQs
Can you get money from your life insurance policy if you're still alive? In some cases, the answer is yes. But keep in mind that we aren't talking about the full stated value of the policy. In other words, if you're covered by a policy worth $25,000, you can't “cash out” your life insurance and get $25,000.
Can I cash out life insurance before death? ›
Can you cash out a life insurance policy before death? If you have a permanent life insurance policy that has accumulated cash value, then yes, you can take cash out before your death.
What is the penalty for cashing out a life insurance policy? ›
Some policies will have a surrender fee in the case of cashing out an entire policy, while others may charge fees for partial surrenders. Other than that, there are no additional penalties or fees. The surrender fee is usually 10% to 20% but it can be as high as 35% to 40%.
Is it worth cashing out a life insurance policy? ›
"When cash is taken out of a policy it will reduce the amount of death benefit, and if too much cash is taken out of a policy it might eventually not be able to remain intact, or "in force," in life insurance language," Teitelbaum says.
What type of life insurance policies can be cashed out? ›
Permanent life insurance, such as universal and whole life policies, comes with a death benefit and a cash value account that you may can cash out while you're still living.
What is the cash value of a $100,000 life insurance policy? ›
A typical life settlement is worth around 20% of your policy value, but can range from 10-25%. So for a 100,000 dollar policy, you would be looking at anywhere from 10,000 to 25,000 dollars.
What are the tax consequences of cashing in a life insurance policy? ›
Lump sum life insurance death benefit payouts and cash value growth in permanent life insurance policies are typically not taxable. Withdrawals, including policy loans, are tax-free up to total premiums paid unless it's a modified endowment contract.
How much will I receive if I surrender my life insurance policy? ›
Cash surrender value is the amount of money you receive from the policy should you decide to surrender it. Generally, the cash surrender value equals the cash value balance minus any surrender fees on the policy.
How much will I get if I cash in my life insurance policy? ›
However, most people receive around 20% of the face value on average, according to LISA. So, if we're using that 20% average to calculate the cash value of a $100,000 life insurance policy, the cash value of the policy would be $20,000.
What is the cash value of a 25000 life insurance policy? ›
For example: A life insurance policy of $25,000 has a face value of $25,000. It is typically the amount of money the insured's beneficiary will receive if the insured dies while the policy is in force. However, there are times where the face value of policy and its death benefit may differ from each other.
Get some money back: Surrendering your policy means you'll get some money back, which is better than getting nothing. Some people may lapse their policy by choosing not to pay, but surrendering is a better option than this because it returns some value.
What disqualifies life insurance payout? ›
Life insurance may not pay out if the policy expires, premiums aren't paid, or there are false statements on the application. Other reasons include death from illegal activities, suicide, or homicide, with insurers investigating claims thoroughly.
How soon can I borrow from my life insurance policy? ›
It is also important to note that in order to borrow from your life insurance plan you will first need to accrue cash-value by paying into your policies. You can expect to pay into your policy for at least two years before being able to borrow any material amount of money against your permanent life insurance policy.
How do I cash out my life insurance before death? ›
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. ...
- Withdraw funds from your policy. ...
- Surrender your policy. ...
- Pay policy premiums using your cash value. ...
- Pro: Receive quick funds. ...
- Pro: Low interest rates on loans.
If you've had your life insurance policy for several years, the insurance company will often allow you to borrow from your policy's cash value. In most cases, you won't have to pay taxes on the money you borrow, but the insurance company will deduct interest payments from your cash value balance.
Can you cash out life insurance while alive? ›
You can cash out part of your life insurance policy before you die in certain situations, like if your policy has a cash value or if you have a terminal illness or certain qualifying medical conditions.
What type of life insurance can you borrow from? ›
Most importantly, you can only borrow against a permanent life insurance policy, meaning either a whole life insurance or universal life insurance policy. Term life insurance, a cheaper and more suitable option for many people, does not have a cash value.
What is the cash value of a $25,000 life insurance policy? ›
Examples of Cash Value Life Insurance
An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.
