Life insurance is an asset that may have hidden value. This hidden value, also known as the cash value portion of your policy, is a great way to get immediate access to money when needed. Whether or not your policy has cash value will depend on the type of policy that it is.
The two main types of life insurance that have a cash value component are whole life and universal life. These are permanent types of life insurance that stay with you as long as you keep making premium payments. The other type of life insurance, term life, is only active for a specific period of time and does not have a cash value portion.
Leveraging your policy for cash needs can be done in a few ways: loans, surrenders, withdrawals, and life settlements. Each of these work in a different way and have different impacts on the value of your policy and its death benefit.
To help you decide if getting cash from your policy is right for you, we’ll address these things in detail, as well as:
- What is cash value on life insurance
- What types of policies are eligible to withdraw from
- Why people use their life insurance policy for cash now
- Factors that influence the cash value of your policy
What is Cash Value on Life Insurance
The cash value component of life insurance is essentially a living benefit for policyholders from which funds can be drawn. The net cash value of life insurance is what you’ll receive when you cancel your life insurance policy. It represents the cash value minus all fees, surrender charges, and any outstanding loans you have against the policy.
In other words: most permanent life insurance policies will have value that you can access immediately, but doing so will usually result in impacting your death benefit.
This is particularly true for whole life policies, and may or may not be for universal life depending on your premiums. There’s a variety of ways in which you can access this cash.
A cash surrender is how much cash you can get from your policy when you subtract the surrender charge from the account’s value. Doing this means the policy is no longer in effect:
you no longer have to make payments on your premium, the death benefit is no longer active, and your insurance company will give you a lump sum of money.
If you want to keep your policy active without losing the death benefit, there are other options. These include partial surrenders and loans. A partial surrender will reduce the overall death benefit; loans will not, as long as which won’t result in your policy being cancelled but will reduce the total benefit available. Not every type of policy will allow for withdrawing cash via the methods described above.
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What Types of Policies Can I Withdraw Cash From?
Before you decide that you want to withdraw cash from your life insurance policy, it is important to figure out what type of policy you have. Some policies will allow you to access cash since they have a cash component, whereas others do not.
Permanent life insurance is the most likely option to provide a cash value component. Types of permanent life insurances include:
- Whole life insurance
- Universal life insurance (and subtypes including indexed and variable)
Unlike whole or universal life insurance, term life does not have any value attached to the account. However, in rare circumstances, a term policy may be sold on the secondary market as a life settlement.
Whole life insurance is the most common policy that has a cash value component. With a whole life insurance policy, the premium and the death benefit stay constant whereas with universal life, you have flexibility of premiums over time.
Whether you have a whole life or universal life, you will have the freedom to make a withdrawal or take out a loan against the policy.
However, you might be wondering: why would I want to withdraw cash from my policy or surrender it? People do it for a number of reasons, which we’ll go over next.
Why People Use Life Insurance as a Source of Cash
For a number of reasons, you may be tempted to tap into your policy as a way to get cash – and this is totally normal! There are many reasons why someone might want to access the cash value portion of their life insurance policy, and some of them include:
- Unexpected medical expenses
- Retirement expenses
- Palliative Care or Hospice
- Emergency situations
- The policy has outlived its original purpose
As you can see above, the most common reason is related to financial reasons: medical expenses, tough times, and retirement. However, sometimes a policy just isn’t as useful as it once was, such as when the beneficiaries have grown financially independent and aren’t reliant on it anymore.
At any rate, you may want to calculate the cash value of life insurance before making a decision.
Factors That Influence the Cash Value of Your Policy
As you know by now, you’ll most likely need a whole life policy or universal life policy in order to tap into your policy for cash. When you make premium payments over time, a portion of that is accumulated as cash value which you may be able to leverage to help cover other financial needs.
There are a number of factors that play a role in determining how much cash is available from your policy. To get an idea of your net cash value of life insurance, consider the following:
- How long your policy has been in effect
- How much you pay in premiums
- How robust the markets are that your policy is invested in
- If you have taken withdrawals or loans out against your policy in the past
If you ask, your insurance company will be able to tell you what the current cash value of your policy is.
Recap: Generating Immediate Cash Value from Your Life Insurance Policy
If you have whole or universal life insurance, there’s a very good chance you can withdraw cash from your life insurance policy.
People withdraw cash from their policy for a number of reasons, such as financial hardship or when the policy is no longer serving its original purpose.
There are a few ways to access the cash portion of your policy, such as through a partial or complete surrender or borrowing from it via a loanl.
There are also secondary markets where you can sell your existing policy, and when you do, this is known as a life settlement.
The net cash value of a life insurance policy will be different for every policy. Factors that influence it include how much you have paid over time and if any interest or investment crediting has accrued.
This information can be found on an annual statement or by calling your carrier.
By understanding the nuances of how your policy works, such as how it can generate immediate cash value, you’ll be able to make better financial decisions especially if faced with a dire situation.