Financial hardships are sometimes unplanned. However, there are a few ways to navigate such challenging times when they occur. Having life insurance helps. Many people with life insurance policies consider cashing in their insurance to offset their debts or address their desperate financial needs. But how can one go about cashing in their life insurance policy? Find out below.
How to cash in a Life Insurance Policy
People who have life insurance policies can use them for different reasons, including as collateral for loans. They can also decide to cash out their life insurance. Cashing out life insurance is easy; however, one needs to leverage cash value withdrawals for the best outcome. With cash value withdrawals, the policyholder can decide to take out a loan against their policy, sell the policy in a viatical settlement or life settlement, or surrender the policy altogether.
The built-in savings account in the life insurance policy makes it easy for policyholders to accumulate value for their policies over time, much like an investment. The ‘savings account’ value increases with each premium paid by the policyholder.
Policyholders need to know the pros and cons of each option available to them before proceeding to cash out the value of your life insurance policy.
The Process Involved in Cashing Out a Life Insurance Policy
To make the right decision, you need to understand the process of cashing out your life insurance policy. This section breaks down everything you need to know.
Cash Value Withdrawal
The premiums you pay monthly or annually go into a savings account built as part of your life insurance policy. With each premium paid, the amount in the savings accounts increases. Your life insurance policy is worth just as much money as you have in the associated account. When cashing out a life insurance policy, the most straightforward approach is to withdraw from the savings accounts’ accumulated sum. You can do this by contacting your insurance provider and notifying them of your plight. They are sure to process your withdrawal within the merits of your contract.
Please note that the amount you’re eligible to withdraw from the account may vary depending on your insurance provider and the type of policy you have.
Considerations for Cash Value Withdrawals
While cash value withdrawals are direct and offer you access to as much money as you have saved in your life insurance policy, there are some associated limitations and disadvantages. These include;
Cash value withdrawals may impact your insurance premium payments. You may face higher insurance premium payments at the end of the withdrawal, thus making the policy more expensive to maintain. It is best to consult your policy agreement and ask precise questions before the withdrawal.
Cash value withdrawals can also reduce the value of your death benefit. The death benefit is the financial compensation your loved ones would get upon your death. It is essential to ask fundamental questions before withdrawing from your life insurance policy.
Please note that withdrawals from life insurance policies filed as Modified Endowment Contracts (MEC) are taxed; This means that you may end up with a lesser amount due to taxes. The taxes deducted will be calculated in the same manner as annuities. With MECs, all withdrawals are taxable until you’ve withdrawn so much that it eats into your principal. MEC policyholders under the age of 59 1/2 may also be required to pay an early withdrawal penalty (usually 10%).
Despite the significant disadvantages of taking cash out of your insurance policy, it is often the best decision for most people. There are other options to choose from, depending on the financial aid needed by the policyholder. Other options include;
Using Life Insurance as Loan Collateral
If you do not wish to take out the cash value in your life insurance, another alternative is to take a loan with the cash value as collateral. This option is the most convenient for people who have poor credit scores. The loan process is quite flexible as there is no underwriting or financial requirements for policyholders who wish to borrow against their policies.
Another significant advantage of taking out a loan against your life insurance policy is the low repayment requirement. Borrowers may decide to default loan repayment while banking on their life insurance to pay it for them. It is important to note that insurance companies often charge interest with loans, pushing the borrower to pay more than they initially borrowed.
It will help if you ask your insurer for the fine prints of the loan process, the associated interest rate, and more.
Considerations for using life insurance as collateral
One of the biggest problems associated with taking a loan from your life insurance policy is the interest rate. The high-interest rates may easily cripple the cash value of your life insurance policy.
Another common problem with taking out loans against your life insurance policy is the risk of lapse. While you don’t have to repay this loan, failing to repay it may run the life insurance account into the ground. It can also reduce any death benefits you’re expecting for your loved ones.
On the bright side, all loans collected against your life insurance policy are tax-free; This means more money without having to pay taxes. But the loan proceeds that haven’t been repaid may become taxable if you surrender the policy or it lapses.
Surrendering Life Insurance Policy
Surrendering your policy is another option for bailing yourself out of financial hardship with a life insurance policy. In this case, you notify your insurer of your decision to cancel the policy. The carrier or insurer then proceeds to send you a check reflecting the accumulated cash value of your insurance policy.
Considerations for Surrendering your Life insurance Policy
The cash value paid by your insurer may be taxable significantly if it exceeds your cost basis. However, the most significant consideration is that you won’t be receiving any death benefits. Surrendering your life insurance policy may also mean a higher insurance rate at a later time when you try to purchase a replacement coverage.
In some cases, insurers or carriers may also place a stiff penalty on policyholders surrendering their insurance. This penalty may be in the form of fines.
Understanding the different options available can help you choose the best one for your situation. If you need expert advice and guidance, visit https://www.millerhanover.com/ .
Miller Hanover Insurance
334 High St Hanover PA 17331