5 Smart Ways for Cashing Out a Life Insurance Policy
A term or whole life insurance creates a reserve from the surplus earnings and premiums, and these accumulations are deposited in the account of the policyholder. However, you must note that you must only cash out a life insurance policy at the time of extreme financial crisis, as it can also have severe repercussions in the long run. A life insurance policy allows the policyholder to cash out their policy in various ways at the time of economic difficulties that are mentioned below.
1. Complete Withdrawal
If you are under a financial crisis or operating on low funds, or maybe you just need to make a big purchase for your home or business, then withdrawal is the most prevalent way to cash out your life insurance policy. At the time of withdrawal, the policyholder holds the absolute right to decide whether they want to draw out a partial amount or the whole amount.
Depending upon your life insurance policy and the amount of your cash value, this process of withdrawal could either reduce your death benefit coverage amount or even get lapsed. Apart from this, the process of withdrawal is also not tax-free. If the policyholder withdraws the sum deposited with the initial 15 years, the amount withdrawn by the policyholder will be subject to taxation along with an early withdrawal penalty of 10 percent if the person is below 60 years of age.
2. Taking Out a Loan
Another most popular way to cash out a life insurance policy is to draw out a loan on the said policy. Every cash value life insurance policy that you take enables you to borrow funds from the policy provider where you can utilise your cash-accumulation policy account as security. However, the loan amount and the interest rate might vary according to the type of life insurance policy you have opted for.
3. Surrendering your Life Insurance Policy
When you are under a complete broke situation and taking a loan on your life insurance plan won't work, you have the option to fully surrender your policy and draw out the complete term life insurance cash value.
However, before choosing to surrender, you must keep various factors in consideration. The foremost point that you must bear in mind is that giving up on your life insurance policy will leave nothing for your loved ones, and they will receive no financial security in case of your untimely demise.
Apart from this, many life insurance policies charge a taxable surrender fee from the policyholder and further reduce the amount of the policy. In case if you have an outstanding loan on your policy, then this amount can further get reduced, and you might also be subject to a higher tax rate.
4. Life Settlement Method
Under this cash-out option for a life insurance plan, the policyholder can trade their life insurance policy to a life settlement organisation or any other individual in place of cash or monetary compensation. Whether you have chosen to buy a single premium insurance plan or you may have chosen a different mode of premium payment. The new buyer of your policy will keep the policy running by paying regular premiums and also receive the mortality benefit at the time of your demise.
However, to avail of this life settlement benefit, the policyholder must be at least 65 years of age, and the main advantage of receiving this life settlement is that it is more beneficial than surrendering your life insurance policy. While this life settlement is the most suitable method to cash out your life insurance policy, the only drawback it holds is that this method is not government regulated, and you cannot be 100 percent assured that you are receiving the right amount.
5. Build your Portfolio
Cash-value life insurance has become extremely popular amongst investors in the present times and also among people who are looking to enhance their retirement earnings. If you have acquired strong cash value in your term insurance plan, you can invest these funds for investing in equity or any other financial instruments to diversify your portfolio.
