Your life insurance policy is likely the second biggest investment, after your home, that you have made. What happens when you no longer can afford your life insurance policy? No longer want the policy? Don’t need the policy? Circumstances change over time, and the reasons that you purchased the life insurance policy in the first place may no longer be applicable to your current situation. You may have options to generate cash from your life insurance policy, depending on the type of policy that you own. For an explanation of the different types of life insurance policies, please view this blog post. Here are the different options that you can explore to generate cash from your life insurance policy:
- Policy Loan. If you have a permanent life insurance policy that has an investment account or cash value, you can likely take out a loan against your life insurance policy. The interest rate for this loan is specified in the life insurance policy contract and will be deducted from your policy cash value/investment account. In most cases, a policy loan is taken out tax-free and can be repaid at any time, including as a deduction against the death benefit at the time of policy collection. A policy loan is not an option with a term insurance policy.
- Bank Loan. If you have a permanent life insurance policy that has an investment account or cash value, a bank or premium finance lender may be an option to lend you money against the investment account/cash value and/or provide a loan for future premiums. The lender will require collateral for the loan – in some instances, the policy itself may be the only collateral required, but in other instances, the lender may require additional collateral or a personal guarantee of the loan amount. Similar to a policy loan, the amount borrowed is tax-free but will accrue interest until the loan is repaid, whether that is from the proceeds received at the time of policy collection or earlier. This type of loan is not an option with a term insurance policy.
- Policy Surrender. If you have a permanent life insurance policy that has an investment account or cash value, you can surrender the policy back to the life insurance company for the amount in the investment account or cash value (less a surrender charge that reduces over the life of the policy). There may be tax implications for a policy surrender – any amount received that is more than the total amount of premiums you have paid into the policy may be subject to income tax. When you surrender your life insurance policy, the coverage ceases once the surrender is completed, and your policy is no longer in force. This option is not available with a term life insurance policy, as there is no investment account or cash value.
- Withdrawal/Partial Surrender. If your policy has an investment account or cash value, you may be able to withdraw some or all of that amount from your life insurance policy. In some cases, a withdrawal will be treated as a partial surrender where the amount of withdrawal will reduce the death benefit on the policy. Your future premium requirements may be impacted by a withdrawal or partial surrender, if the investment account or cash value in the policy is being used to cover part of your premium payments. There may be tax implications for a withdrawal or partial surrender, but in most cases, as long as the amount received is not more than the total amount of premiums that you have paid into the policy, you should not have a tax liability.
- Sell the Policy/Life Settlement. Did you know that you can sell your life insurance policy for its market value in a transaction known as a Life Settlement? Any type of policy can qualify, and the value is based not on the investment account or cash value of the policy but rather on the future expected premium payments on the policy and your health profile. Typically, the Life Settlement option is available to people over the age of 65 and policies with a death benefit greater than $50,000. How much is your policy worth? Life settlements can pay many times more (average is about 4 times!) than the investment account/cash value. Try our Life Settlement Calculator to get a policy valuation estimate. If you have a term life insurance policy, this is your only option to get cash out of your policy after years and years of making premium payments.
These options can potentially provide you with some, all, or multiples more than your investment back in your life insurance policy. If you have additional questions about how to get cash out of your life insurance policy, you can contact one of our experts at 866-679-9410 or email us info@qcapital.com to discuss your situation. The Q Capital team is available and ready to explain to you all that you would want to know about life settlements.
Remember: Never abandon a life insurance policy without looking at the life settlement option first!
