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  • Writer's pictureAhsan Malyk

Can I Withdraw Money From My Life Insurance?

One of the most important advantages of permanent insurance is that it accumulates cash value that can be utilized as a down payment on a home, a college education, a retirement income supplement, or for other major expenditures.

However, how can you access the money from your life insurance plan? Three important questions will be addressed in this article:

  • Which life insurance products accrue cash value?

  • How can I get the money from my life insurance policy?

  • Why not just use the cash value instead?

The various forms of life insurance with cash value

Term life and permanent life insurance are the two main types. Only long-term insurance contracts can accrue financial value. Although term life insurance is frequently less expensive, it does not generate money.

For several reasons, permanent life insurance policies are often more expensive than term life insurance policies. First, unlike policies that only cover you for a certain period, or "term," permanent policies cover you for the rest of your life.

Second, policies with permanent coverage can accrue cash value that can be utilized to cover future costs, such as boosting retirement income. Contrarily, term life insurance is what is sometimes referred to as "pure insurance," meaning that it only provides a payout to your beneficiaries in the event of your death (the "death benefit") and nothing else.

The two main categories of permanent life insurance are whole and universal life insurance. The primary distinction between them has to do with guarantees and flexibility, even though both are permanent, offer a specified death benefit, and can develop monetary value.

The death benefit of whole life insurance remains constant during the policy, and the premiums are guaranteed to be at a certain level. Additionally, you can forecast the minimum cash value your policy will have over time because of its guaranteed rate of cash value growth. These plans can also provide additional profits if purchased from a mutual life insurance provider like Guardian.

Universal life insurance, in contrast, provides more flexibility with fewer guarantees. For those with fluctuating salaries, it allows you the flexibility to change your premiums up or down within a certain range.

If little premium payments are made over an extended period, this could impact the rate of cash value increase and potentially the size of the death benefit. 6 The precise amount of cash value you actually accumulate with your whole life and universal life will vary depending on the terms of your policy.

How to get money out of your life insurance policy: Four ways

It often takes a few years for a policy's cash value to increase to a sizeable amount, but once it does, you'll have a financial asset that offers numerous benefits you can utilize while you're still alive. Unfortunately, a lot of folks don't know how to optimize their cash value benefit, therefore they never do. Accessing the cash value of a universal or whole life insurance policy can be done in four different ways:

Surrender: One choice is to entirely revoke the coverage and receive the cash surrender value. The sum you get will be reduced by any costs deducted, and you will no longer be covered by life insurance.

Surrender fees can be high, particularly with a more recent policy. It should only be done as a last resort to surrender a policy before retirement age, especially if you don't have any alternative life insurance in place (in that case, think about getting a term life insurance quote before signing the paperwork).

If the cost of the premiums is why you wish to cancel your permanent life insurance policy, you might want to consider utilising the cash value to pay the premiums.

Withdrawal: You may be able to withdraw cash from your permanent life insurance policy in various circumstances, and as long as the amount is less than what you paid into the policy, you may not be subject to income taxes on that money.

There are, however, some drawbacks: Depending on the value of your cash account and the precise provisions of your policy, your death benefit may be decreased and may even be reduced more than the amount taken. To learn more about how to take money out of your specific policy, speak with your agent or the life insurance company.

Loans: Although the amount varies, you can often borrow money through your insurance. The money comes from the insurer, who utilizes your insurance as collateral, not your policy itself. Although interest on life insurance loans is paid, the rate is often lower than that of personal or home equity loans. There is no loan application or credit check, and your interest rate is unaffected by your credit score.

Although you have the option to forego repayment, your death benefit will normally be reduced by the balance of the existing loan. If you need money now but want to maintain the full death benefit in effect by returning the loan amount, a policy loan may be beneficial.

Pay your life insurance premium with cash value. To make it simpler to maintain your coverage, you can normally utilize the funds in your cash value to pay all or a portion of your insurance premiums. This is a common choice for elderly policyholders who wish to maintain their life insurance coverage yet use their retirement income for living expenses.

Why not just utilize my monetary value instead?

A policy's cash accumulation may eventually surpass its "face value" or death benefit. If you've built up monetary worth that you don't plan to utilize in other ways, you could instead use it to boost the amount of your beneficiaries' death benefit.

Consider purchasing a whole life or universal insurance policy to safeguard your family and secure your financial future. You should discuss with someone who can assist you choose just what kind of insurance is best for you.

Your age, financial circumstances, familial situation, and other considerations will all play a significant role. Suppose you don't already have a financial advisor with whom to discuss insurance. In that case, Guardian can provide you with information on obtaining life insurance or even help you choose a local financial advisor who will pay attention to your needs and lead you in the right direction.

Frequently Asked Questions regarding Accessing the Cash Value of Life Insurance

Can a life insurance policy be redeemed before death?

You can withdraw money before death if you have a permanent life insurance policy. The main methods for doing this are three. You can first borrow money against your policy (repaying it is optional). Loans typically come with lower interest rates than bank loans, don't call for credit checks, and don't impact your credit score.

Second, you can take some money out of your cash worth all at once or in installments. Your death benefit will typically be decreased for either of these choices. The final choice is to cancel the policy entirely. As it cancels the procedure and the associated life insurance coverage, this should generally be viewed as a last resort.

Taxes and fees may be paid along with surrender, considerably lowering your cash worth. You might also be able to utilize your cash value to pay the premium if premium payments are a problem.

How much of my life insurance may I take out?

The type of policy you have (such as whole life or universal life), the amount of insurance you have, and the length of time you have held the procedure will affect how much cash value you have. If you haven't taken a withdrawal, your cash worth increases tax-deferred the longer the policy has been in effect.

Keep in mind that there is a distinction between the "face value" of your death benefit and the amount of your cash value.

How is a life insurance policy cashed out?

There are three primary ways to cash in on your insurance policy. You can either withdraw the money (in one lump sum or recurring payments) from your cash account, borrow against it with a low-interest life insurance loan, or surrender your policy.

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