Cashing in Your Life Insurance: The Pros and Cons
You bought it so your family would be taken care of in the event of your death, but now your kids are grown. You outlived the crucial period in which that life insurance would be most needed. Is there any reason not to cash in the policy now?
First, Make Sure It’s Possible
Not all types of life insurance provide the option of cashing out. Before you get dollar signs in your eyes, take the time to check. If you invested in a term life insurance policy, then you’re pretty much out of luck. Most whole life insurance policies will include an option to cash out though, so if that’s’ what you’ve got, go ahead and check the details of your policy.
What you want to look for is the available partial surrender value, this is the amount you’ll be getting back if you do choose to go ahead and cash in.
Reasons to Consider Cashing In Now
Now, let’s consider some of the best reasons for going ahead with cashing in a life insurance policy while you’re still alive. For a lot of people who consider this option, the driving issue will be something like the growth in healthcare costs or a dip in the value of their stocks. With the rate at which healthcare costs have grown over the years, no seniors could be blamed for failing to account for the full cost of medical expenses in their retirement years. And no one can foresee what the stock market will do at the moment you need to cash in your retirement.
If you or your family members need that money to cover your retirement living expenses, health care expenses or long-term care costs, then it may well be a smarter financial move to cash that policy in rather than use up all the family’s savings to satisfy those needs.
Reasons Not to Cash In
On the other hand, there are some pretty compelling reasons to hold off on that decision. For one thing, if your spouse is still alive you need to think about their well being. If they don’t have the payout from the life insurance policy, will they be okay financially after your death?
If you currently have debt you haven’t paid off, then whatever savings and assets you have will be distributed after your death to pay it off through to the probate process. The most notable exception is your life insurance policy – it will remain untouched by probate because the money belongs to your family members. Therefore if you know your debts will eat up a significant portion of the belongings you leave to your family, then it’s probably smartest to leave them that policy to get by on.
Make sure you consider taxes and surrender fees. If you haven’t had the policy for that long, then the terms will likely include surrender fees for pulling out your money so early. If you only take out part of the total available cash in your policy, then you may not have to worry about taxes. If you cash in the whole thing or take out more than the amount you’ve paid in, then you’ll be taxed on the gains.
Cashing your policy in isn’t your only option if you want cash now.
Many life insurance policies will provide the option of exchanging your policy for either a long-term care insurance one, one that includes some long-term care coverage, or an income annuity that makes it possible to avoid paying taxes on your gains.
Take out a loan
Another option many whole life insurance policies provide is taking a loan out on your policy. This works best if you’re pretty sure you can pay the loan back, but does help you access the money without the amount you take out being taxed. As with all loans, you will owe back interest based on how long it takes you to pay it back.
Finally, you can sell a whole life policy to either another individual or a life settlement company. You get a set amount in cash in exchange for the policy, they commit to continuing to pay the premiums, and they’re the ones who receive the payout at the time you die. Most investors will only be interested in a policy if you’re in your 70s or older; a healthy 50-year old’s health insurance policy just won’t look like as good of an investment.
Depending on the current status of your finances and the needs of your family, it may be worth taking advantage of one of these options now. If you’re not sure if it’s the best decision for you, consider discussing it with a financial advisor. They can help you more clearly parse your options and what different choices will mean for you and your family.