People may have many reasons for buying life insurance, but it really boils down to taking care of their loved ones. Having life insurance provides peace of mind as the individual knows that their family is less likely to suffer financial hardships.
However, difficult economic times can lead a person to wonder whether or not they should cash out their life insurance policy. This is not a decision to be made lightly, nor should it be undertaken without understanding the consequences.
If you have a term life policy, then you may be out of luck. These policies usually do not have a surrender value, which means that if you want to “cash out” this policy, you may only get the value of the premiums you have paid. With all sorts of fees and penalties, this may not add up to much.
Unlike term life insurance, whole life insurance covers you for your lifetime while also building cash value that you may be able to access. Essentially, a whole life policy features two main components. One of these is the face value. The other is the cash value. Face value is simply the amount that is owed to your beneficiaries upon your death. However, the cash value is more like a savings account where a few dollars from your premiums accumulate. Funds deposited in this account may receive earnings from investment as well.
You may be able to access the cash value in your whole life insurance policy, especially if you’ve had the policy for several years. Generally, 12 to 15 years are required to accumulate a decent amount of money in the cash value component of the policy. Depending upon your policy, you may be able to withdraw a portion of that amount or get a loan against a portion of that amount within the first few years that you have the policy. However, you are likely to pay sizable fees.
The terms of your policy dictate how you may access any funds. Loans are frequently available. While you do not have to pay back these loans, the amount will decrease the death benefit paid to your beneficiaries. With the interest accruing, this can mean a significant reduction. Typically, you are not taxed for these loans during your lifetime. If a loan is still unpaid at your death, then your beneficiaries will be responsible for the taxes.
Your policy’s cash out value also may be referred to as the available partial surrender value. If you choose to surrender the policy, this is the amount that you will receive in cash. This amount typically is far less than the face value of the policy. Surrendering the policy means that you no longer have life insurance, so your beneficiaries will not receive a death benefit. It is generally not advisable to take this route unless you have another life insurance policy in place. Life is uncertain, and you don’t want to leave your loved ones vulnerable in the event of your death.