Cash-out Life Insurance: Assessing Your Financial Options

Have you ever thought of turning your life insurance into cash while you’re still alive? A Lot of people are asking this question, especially if they need money for something important right at the time. Life insurance is not just about what happens after you’re gone.

A lot of people have life insurance, especially whole life insurance. When thinking about life insurance, we all already have an idea that Life insurance is all about helping your family financially after your life, but some policies, like whole life insurance, actually build up cash value that can help you out when you’re alive. Let’s have a look at how it works, what you should watch out for, and how you can make the most of it.

Let’s explore everything you need to know about how to cash out a whole life policy, the pros and cons of doing so, how to withdraw money without paying penalties, the time it takes to cash out, and much more.

What Does “Cashing Out a Life Insurance Policy” Mean?

When people talk about cashing out life insurance, they usually mean that they want to withdraw the cash that has been built from a whole life insurance policy. Whole life insurance is a kind of permanent life insurance that helps out your family after your death but also has a cash account that grows over time 

Whole life insurance is different from term life insurance, which only pays out if you die during a certain time. Whole life insurance saves up cash that you can use while you are still alive. Cashing out means you can either take some of that money out or cancel the policy completely and get the full cash value.

Can You Cash Out Life Insurance?

The short answer to this question is Yes. You can cash out life insurance, but it depends what kind of the type you have 

• Term life insurance: This type of life insurance doesn’t build any cash value, so you cannot cash it out.
• Whole life insurance: Yes, this type of insurance policy builds cash value that you can cash out.
• Universal life insurance: This type of insurance policy is similar to whole life; universal life insurance is also permanent and builds cash value. But the amount available depends on how much the cash value has grown
• Variable life insurance: This policy combines life insurance with investment options. The cash value can grow based on the performance of the investments you choose

How Does Cashing Out Whole Life Insurance Work?

Whole life insurance not only offers you a payout but also builds up cash value over time. That is because part of the money you pay in premiums goes into a kind of savings account. Over time, that money grows, and the best part is that it grows tax-deferred, so you don’t have to pay taxes on it while it’s building up.

• Borrow from the policy’s cash value: This works like a loan. You will pay it back with interest, but the rate is usually low.
• Withdraw some of the cash value: You don’t have to pay it back, but it may reduce how much your policy grows and could lower the payout your family gets when you pass away.
• Cancel the policy: You’ll get the full cash value that has built up, but your life insurance will end, and you won’t be covered anymore

Cashing Out a Whole Life Policy Example

Let’s say you have a whole life policy with a $100,000 death benefit and $20,000 cash value. You can:

• Borrow $10,000 as a loan.
• Withdraw $5,000 from the cash value.
• Surrender the policy and get the full cash value minus surrender charges.

Can You Cash Out Life Insurance Before Death?

Yes, with the whole life insurance and other permanent policies that build cash value, you can cash out life insurance before death. This is a unique feature that term life insurance does not offer.

You have to keep in mind that cashing out reduces or ends your death benefit, which impacts the benefits that your loved ones get after your death.

How to Withdraw Money From a Life Insurance Policy Without Penalty

One of the biggest questions is: how to withdraw money from a life insurance policy without penalty?

Here’s what you should know:

• You can usually take out a policy loan without penalties, but loans accrue interest.
• Withdrawals may reduce your death benefit and cash value.
• Fully surrendering the policy can trigger taxes if your cash value exceeds the total premiums paid.
• If you withdraw funds before the policy has built enough cash value, surrender charges may apply. 

To avoid penalties and taxes:

• Use policy loans rather than withdrawals if possible.
• Only withdraw up to your cost basis (total premiums paid).
• Consult a financial advisor to understand the tax implications.

How Long Does It Take to Cash Out a Life Insurance Policy?

The time to cash out a life insurance policy depends on the insurer and the method you choose:

• Policy loans: Usually approved within days to a week.
• Partial withdrawals: May take a few days to a couple of weeks.
• Surrendering the policy: Can take 2-6 weeks because the insurer must process paperwork and pay out the cash surrender value.

Always check with your insurance company for specific timing.

Cash Out Life Insurance Pros and Cons

Before deciding to cash out your policy, consider the advantages and disadvantages.

Pros

• Access to cash: You can get money when you need it most, such as for emergencies, medical bills, or debt repayment.
• No credit check: Loans or withdrawals are against your policy’s value, not your credit.
• Flexible: Some policies allow partial cash-outs while keeping some coverage.

Cons

• Reduces death benefit: Your family gets less money if you cash out.
• Potential taxes: If you surrender and the cash value exceeds your premiums paid, you have to pay income tax on the difference.
• Possible fees: Surrender charges and loan interest can eat into your cash.
• Risk of policy lapse: If loans aren’t repaid, the policy could lapse, causing loss of coverage.

When Should You Cash Out a Whole Life Insurance Policy?

Deciding when to cash out a whole life insurance policy depends on your financial situation and goals:

• You need funds for an emergency or large expense.
• You no longer need life insurance coverage.
• The policy costs more than it’s worth (high premiums, low cash value).
• You want to invest the cash value elsewhere.
• You’re considering retirement income and want to use the cash value.

Before cashing out, consider alternatives like borrowing or partial withdrawals to keep some coverage.

Can I Cancel My Life Insurance Policy and Get My Money Back?

If you decide to cancel your whole life policy, you can get your cash surrender value, which is your policy’s cash value minus any surrender charges and fees.

Keep in mind:

• If the surrender value exceeds what you paid in premiums, you may owe taxes on the gain.
• Cancellation means no more coverage or death benefit.
• Term life policies usually don’t have any cash value to refund.

What Happens If I Cash in My Whole Life Insurance Policy?

Cashing in your whole life policy means surrendering it for its cash value. This stops your insurance coverage, and you receive a lump sum payment.

Here’s what happens:

• You get the cash surrender value.
• The death benefit ends immediately.
• Taxes may apply if your payout exceeds the total premiums paid.
• You lose your insurance protection.

Make sure to fully understand the consequences before cashing in your policy.

FAQs About Cashing Out Life Insurance Policies

When should you Cash Out a Whole Life Insurance Policy?

Cashing out is a good idea if you no longer need the insurance, you need money for something urgent, or you want to use the cash for other investments. It’s all about finding what makes the most sense for your situation.

Cashing Out Whole Life Policy: Is It a Good Idea?

It depends on your goals. It can be helpful for emergencies or debt,, but may reduce your family’s future financial security. Always weigh pros and cons.

How to Withdraw Money From a Life Insurance Policy Without Penalty?

Use policy loans rather than withdrawals when possible. Withdraw only up to your cost basis. Avoid surrendering the policy early to reduce taxes and fees.

How Much Tax Will I Have to Pay If I Cash Out My Life Insurance?

If your cash surrender value exceeds your total premiums paid, the gain is taxable as ordinary income. If you only take loans or withdrawals up to your cost basis, usually no tax applies.

Can I Cancel My Life Insurance Policy and Get My Money Back?

Yes, with permanent life insurance, you can surrender the policy and get your cash surrender value back, minus fees and taxes. Term life insurance generally offers no cash back.

What Happens If I Cash In My Whole Life Insurance Policy?

You receive the cash surrender value, lose coverage, and may owe taxes if the payout exceeds premiums paid. Your beneficiaries will no longer have a death benefit.

Summary

You can cash out a life insurance policy only if it’s whole life insurance, a permanent policy with cash value, but with term life insurance, you are not able to build cash value, and it cannot be cashed out. Cashing out or taking money from your policy can be a helpful way to get extra funds, especially during tough times in your life, but it also comes with some drawbacks like reducing the amount your family would get, possible taxes, and fees..

Before you decide to cash out, you can consider other options like taking loans or making a partial withdrawal, and it is also a good idea to talk to a financial advisor so you fully understand how it could affect your coverage and what taxes you need to pay.

Before you make a move, make sure it’s the right one for your financial future. Speak with a licensed insurance professional today to explore your options, minimize taxes, and protect your family’s financial well-being.

Don’t guess and get expert advice tailored to your unique needs.