Cash Out Your Life Insurance
Should you cash out your life insurance or borrow against the cash value of your plan? If you have a permanent life insurance policy and you are debating whether or not you should cash out your life insurance, you should understand the advantages and disadvantages of cashing out your policy before you submit the request. Many life insurance plans, such as whole of life plans, earn cash values as you pay your premiums. A portion of the money you pay each month or year will go towards the premium and the remaining amount will sit in an account where you earn interest. If you have had your life insurance plan for quite some time, you may be surprised to see you have accrued quite a bit of cash value in the account. We recommend that you do your research before you cash out your life insurance policy and understand exactly what you are doing so that you can make the right decision based on your own needs.
The Difference Between Cashing Out Your Life Insurance and Borrowing From Your Policy
There are two ways to receive cash from your life insurance policy and it is important to understand the difference between each method before you choose to surrender your insurance plan. The first way to get cash out of your life insurance plan is to request a loan or make a withdrawal. When you request a loan, you are technically borrowing money from yourself and you will receive a check for the amount of money you have requested with this money being deducted from the cash value of your account. You then have the choice of increasing your monthly payments to repay the amount borrowed or leaving your premiums as they are. If you leave your premiums as they are you will need to check with your insurance company to make sure that you are still funding the policy adequately so it is cancelled. When you borrow and you do not repay the money you have borrowed, you may have no choice but to increase your premiums in order to keep your policy active.
The second option to cash out your life insurance is to surrender your plan and take the entire cash value that is sitting in your account. Of course surrendering a permanent life insurance plan will terminate all of your life insurance benefits. The cash value that is in your account will be sent to you as a “refund” and the insurer has the right to deduct any surrender fees or charges. When you cash out your life insurance by surrendering the policy, we always recommend that you have another life insurance policy in force so you can protect your family. You should never surrender your policy for cash if you do not have any insurance in effect and you have not planned for your future with another financial instrument.
Should You Take Out a Loan or Cash Out Your Life Insurance?
Your permanent life insurance plan may be part of your overall financial strategy. If you want to protect the long-term financial security of your family, you need to consider the consequences of surrendering your life insurance to see if it will affect your family. One of the primary reasons why insurance agents recommend buying permanent life insurance is because you are investing in a death benefit and you are accruing cash values. The living benefits of a permanent life insurance policy accumulate on a tax-deferred basis. This means that when you are in need of a financial safety net, the decision to borrow against your policy rather than surrender it makes more sense. You have the option borrow from your policy for any reason and you still have peace of mind in knowing the death benefit is there if the unexpected happens. Cash out your life insurance and your death benefit is lost.
What We Recommend If You Cash Out Your Life Insurance
If you do decide that the premiums are too high on your permanent life insurance plan and you simply cannot maintain them, you you have the option to surrender your plan. We always recommend you have another life insurance plan in force before you submit a termination request. You can discuss converting your policy to a term life insurance plan and using the premiums from your cash value to pay the term insurance if you want to pay the policy in full. We recommend doing this so you have peace of mind in knowing your premiums are paid and you have ongoing protection.
If you have had your permanent life insurance plan since you were a child, it may be very tempting to cash out your life insurance policy. While it is tempting, you are terminating a guaranteed benefit that cannot be cancelled or denied. This could become an issue if you find that you have a serious medical condition and you do not have any other form of insurance. Make sure you cover all of your bases and consider borrowing against your policy. As long as you research your options, we are confident you will make the right choice.