Think carefully before cashing in your life insurance policy.
Times are tough.
You are in a financial bind.
You are considering taking advantage of the cash-value of your life insurance policy.
According to a recent Investopedia article titled “Cashing in Your Life Insurance Policy,” there are both drawbacks and benefits to doing so.
First, determine whether you have other options.
By using your life insurance, you could be sacrificing important long-term goals.
If your whole or universal life insurance policy is your only option, there are a few ways you may access the cash account within the policy.
What are they?
You can make withdrawals from the account.
You can take a policy loan.
You can surrender all or part of the policy.
You can also sell your policy for cash.
If your underlying motivation is a current cash flow crunch and you still need the policy to protect your family, then contact your insurance agent to reduce the premium payments and the death benefit.
You may be better off keeping a reduced death benefit with more affordable premiums
But, if you no longer need the policy, know that there are consequences to consider regarding how you access the money.
If your policy is not classified as a "modified endowment contract (i.e., MEC)," then you can make limited non-taxable withdrawals up to your basis in the policy.
What if your policy is considered a MEC contract?
Withdrawals would be subject to income tax and an additional penalty if taken before age 59 ½.
If your withdrawals reduce your cash value, your benefit could be reduced.
This would impact your estate plan and could compromise the protections the policy would provide your family.
Although withdrawals may be tax-free, they are not always free.
To keep the same death benefit, premiums will increase.
Your policy could also lapse.
What happens if you choose to surrender your policy for its cash value?
You will have cash but no death benefit protection.
If you sell the policy for cash to a settlement company, the new owner will pay the premiums and receive the death benefit when you die.
You must also have a policy of at least $100,000 in death benefits.
Fees, commissions, and taxes associated with life settlements will reduce the amount you receive.
All that noted, if you truly have no need for the insurance and have a need for the cash in retirement, a life insurance settlement may be an excellent alternative to letting the policy lapse.
Work with an experienced estate planning attorney or financial advisor to make sure your choice is the right one for your situation.
Reference: Investopedia (January 9, 2019) “Cashing in Your Life Insurance Policy”