Millions of adults own a life insurance policy. Whether you own a permanent form of life insurance such as a whole life or universal life policy, or you own a term life policy, you likely purchased life insurance at some point. After all, once we grow up and have dependents, we want to know they will be taken care of if something were to happen to us. It is important to fully understand your insurance policy so that you choose the one that is best suited for your needs. Term policies and permanent policies have some significant differences. It is also important to understand the difference between cash value and face value in life insurance. If you decide you no longer need a life insurance policy, knowing the difference between cash value and face value will help guide you in the right direction.
Why would you no longer need your life insurance policy?
People may decide they no longer need or want their life insurance policy for a number of reasons. Each situation is unique and you should consider your current health and life situation before you make any decisions. Reasons for surrendering or selling a life insurance policy include:
- No longer needing the policy: once your dependents have grown up and are financially independent, you may no longer need the amount of coverage you purchased. You may decide that it is no longer worth it to pay the premiums.
- Needing to get out from under the premium payment: if you are facing tough times financially, paying a monthly or annual premium may not be financially feasible.
- A change in health status: if you’ve been diagnosed with a serious or terminal illness you might need money now to help cover your healthcare costs.
- Needing an influx of cash: if you need to fund retirement or other life goals, and you no longer need the death benefits associated with your policy, you may benefit from selling your policy to help you achieve financial stability now.
If any of these things fit with your current health and life situation you may decide to sell or surrender your policy. This is a scenario where it is important to know the difference between cash value and face value in life insurance.
Cash value versus face value in life insurance:
The face value of a life insurance policy is the same as its death benefits. For example, if your policy has a face value of $250,000, your beneficiaries would receive $250,000 in the event of your death.
The cash value of a life insurance policy refers to the amount of accumulated cash value the policy has built up as you paid premiums into it. You can borrow against this by taking out a policy loan, or you can surrender the policy and receive a payout for this accumulated cash value. Borrowing against the policy’s cash value will keep your policy in force as long as you continue to pay the premiums and repay the loan.
Any outstanding loan balance would be deducted from the policy’s death benefits. Surrendering the policy for its cash value will terminate your policy.
There is also potential cash value in a life insurance policy if you were to decide to sell the policy. Selling your life insurance policy for cash through life settlement brokerage can be an excellent way to obtain cash from your policy while you are still living.
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Options for accessing the cash value of your life insurance policy:
Understanding the difference between cash value and face value in life insurance is an important place to start if you want to access the cash value of your life insurance policy.
However, you will still need to know several things. First, what type of policy you own makes a difference. Term policies do not generally offer an accumulated cash value option. If you own a permanent life insurance policy, it may accumulate cash value as you pay into it. Think of this as a sort of savings account you can access after a period of time. To access the money this way, there are two options:
- Take out a policy loan: this option will keep your policy in force as long as you continue to pay the premiums and pay back the loan as agreed. This can be a good option if you need an influx of cash but want to keep your policy in force.
- Surrender the policy for its cash value: this option allows you to surrender the policy back to the company and receive a check for a portion of its cash value. This will terminate the policy and your beneficiaries will no longer receive a payout in the event of your death.
You may also decide you would rather sell your policy. If you decide to do so, you should be familiar with life settlements solutions and the specifics of each option. Knowing that term life policies do not typically accumulate cash value and understanding how that affects the difference of cash value and face value in life insurance is important.
The two types of life settlements solutions:
There are two options you can consider if you have decided to sell your life insurance policy for cash. Both are similar, but each has its own requirements and implications so it is important to understand them both:
- Traditional life settlements: also called senior life settlements these are the most common settlements in life settlement brokerage. Generally, your policy will need to have a face value of at least $100,000. You will need to be aged sixty-five years or older and have a life expectancy of around fifteen years.
- Viatical settlements: these are reserved for those who have received a terminal diagnosis. In this option the buyer, also referred to as the viatical settlement provider, will purchase your policy and you will receive a payout. The age is more flexible with this option, but your life expectancy needs to be around two years, sometimes as much as four years.
Each of these options will involve selling your permanent life insurance policy to another person. That person will assume responsibility for your policy, including payment of premiums.
The buyer or beneficiaries of the buyer’s choosing will receive the death benefits upon your death. Your beneficiaries will no longer be entitled to the benefits. It is also important to understand any potential tax implications associated with selling your policy. A viatical settlement is not typically taxed, but a traditional life settlement is subject to taxation, so you will want to speak with a trusted tax advisor to understand how this may affect you.
You may want to use a life settlement calculator to estimate the value of your policy. This online tool allows you to input basic information about yourself and your policy to get an idea of what your policy may be worth in a sale. Understanding the difference between cash value and face value in life insurance can help you make the best decision.
Selling a term life insurance policy:
While life settlement brokerage generally involves the sale of a permanent form of life insurance, selling a term life insurance policy for cash is possible. A term policy is written for a specified period of time, or term.
The term is usually between five and forty years. Many companies offer a convertibility (or conversion) rider, sometimes at an additional cost, that you can add to your policy. This rider allows you to convert your term policy to a permanent form of life insurance. Your policy would then be able to be sold if the other criteria as listed above are met.
Steps for selling your policy:
Now that you understand the difference between cash value and face value in life insurance, you may realize that there is potentially much more money to be made from selling your policy. In fact, you may receive up to four times the amount you could receive from surrendering your policy for its accumulated cash value. You may choose to use a provider or sell the policy on your own. Each of these has its pros and cons:
- Using a provider: if you use a provider, you will have guidance through the process. The provider may also be able to get multiple bids on your policy and get a higher payout for you. He or she will receive a commission for their part, however, which is usually a percentage of the sale. This will be deducted from your payout prior to you receiving a check, so you will want to be aware of how it may affect you.
- Selling on your own: if you sell your policy on your own you will keep the entire payout since there will be no commission due to the provider. However, you will not have their guidance and if you miss the bidding aspect you may receive a lower offer for your policy.
Once you decide whether to use a provider, the process of selling your policy looks like this:
- Application: in this first step of the process, you will fill out an application. It will include basic information about yourself and your life insurance policy. You will also fill out a medical release form to allow your medical records to be accessed as well as a form allowing your insurance policy information to be accessed.
- Documentation: during this step the company will use the application and release forms you filled out to gather the information they need to make a decision
- Review: during this step the company will use all the information they have gathered to determine what your policy is worth. They will make a decision on whether they want to move forward with the sale of your policy. They may also decide not to purchase your policy.
- Offer: this is when you will receive your offer. The offer may or may not be negotiable. You may also decline the offer and walk away from the sale at any time.
- Closing package: during this step all the final documentation for the sale of your policy will be signed by all pertinent parties. These documents vary by state. Once this step is completed you should be able to get a timeline on your payout.
- Funds transfer: this is when you receive your payout. You may receive your payment in one lump sum or in several payments over a predetermined period of time.
You can expect the process of selling your policy to take several weeks to several months. Ten weeks is a good average.
Difference between cash value and face value in life insurance, summed up:
Once you understand the reasons a person may no longer need or want a life insurance policy and you understand the difference between cash value and face value in life insurance, you can make a well-informed decision as to what is best for you. Your life insurance policy may be able to provide you with the influx of cash you need now, while you are still living. You can proceed now with confidence, knowing you have all the information you need to get the most money from your policy.
Questions and answers:
What is the difference between cash value and face value in life insurance?
Cash value refers to amount of cash you may able to get from your policy through policy loan or surrender, or the sale of your policy. Face value refers to the amount of the death benefits.
How long does it take to sell a life insurance policy?
You can expect the process to take several weeks to several months with ten weeks being a good average.
Can I sell a term a life insurance policy for cash?
Life settlement brokerage involves the sale of permanent forms of life insurance. However, if your term policy has a convertibility rider you may still be able to sell it. Your life insurance agent can help guide you through this process.
Do I have to be terminally ill to sell my policy?
No, traditional life settlements do not require you to have a terminal diagnosis. Only viatical settlements have this requirement.
How can I know how much I might get from selling my policy?
You can use a life settlement calculator. This online tool will allow you to input some basic information and get an idea of what your policy is worth. This is not a guarantee, only an estimate.
Don’t lose your lifelong investment. Discover your policy’s value today.