If you are in dire need of financial assistance, it may be unwise to shackle yourself to costly, monthly life insurance premiums. Sometimes, it is prudent to stop paying premiums and figure out how to get cash from your policy, instead of continuing to dump cash into it. As is the case with any important decision, it is essential that you are clear about what you want to accomplish--what is your goal? If your goal is to provide a death benefit from your life insurance policy for a loved one, then think long and hard before you stop investing in this policy. However, if your time horizon is more immediate and short-term, then it makes sense to explore the best way to use your life insurance policy to free up as much cash as possible by cashing in life insurance policy
There are several ways to access the cash value embedded within your life insurance policy. Cash value life insurance policies were designed to accommodate this eventuality. These policies accumulate reserve money through excess premiums. The premium includes an excess amount that the insurance company transfers to a cash accumulation account. (In other words, there is a savings account feature inside your insurance policy.) This kind of policy is designed so the policy owner may withdraw cash from this policy in order to meet an urgent financial need. The typical way to access the cash in an insurance policy is to take out a policy loan or to surrender some (or all) of the death benefit.
Before you make a decision to pull cash from your policy, carefully weigh your options. Choosing a poorly suited method for cashing in your life insurance policy can result in serious ramifications. For example, the more cash you withdraw, the more you lower the available death benefit. Furthermore, if you are not careful, you may end up having to pay income tax on your life insurance policy cash withdrawal. This happens when the amount you withdraw supersedes your basis in the policy. Another possible unwanted side effect when you decrease the cash value account in your policy is a possible increase in your policy premium in order to prevent your policy from lapsing.
Usually, an insurance owner is entitled to withdraw specific amounts from their life insurance policy. The allowed withdrawal amount is contingent on the type of policy that has been taken out, as well as the insurance company that issued the policy. When done properly, cash value withdrawals are not considered taxable income.
A policy loan is an alternative to a cash withdrawal from the policy. In such cases, your personal account functions as a form of collateral. The loan amount available is not arbitrary. The amount you can borrow hinges on the amount of funds available in the policy's cash accumulation account and the terms of the policy. This type of loan can be very helpful because it is not subject to taxation. Also, you are not required to make a loan re-payment.
Loans and withdrawals enable you to seek immediate, financial assistance, while still retaining certain elements of your life insurance policy and death benefits.
However, if you are looking for the ultimate opportunity to cashing out a life insurance policy, your choice probably narrows down to the choice between surrendering your policy and selling this policy. Each of these alternatives eliminates the need to pay additional premium payments, while putting cash in your pocket. Typically, you will get considerably more cash by selling your insurance policy to an investor than you will get by turning in the policy to the life insurance company that issued the policy.
Related Article - What Is Cash Surrender Value?