When and How To Cash Out a Life Insurance Policy

If you have a whole life insurance policy, a universal life insurance policy or a permanent life insurance policy, you can access its cash value during your lifetime. Even if you have a term life insurance policy, you can get a cash surrender value for it, if the need arises.

Generally speaking, finance experts say to wait 10 to 15 years before cashing out a life insurance policy or selling it. There are many reasons for this, but there are also reasons to do it even sooner.

Cashing out a policy won’t impact your credit, and you won’t have to do a credit check to get the money you may need quickly. However, there are financial repercussions to cashing out a policy, like putting a dent in long-term financial plans, having to pay taxes on the money and policy cancellation. You may end up leaving surviving loved ones nothing, if you cash out completely, or less than you’d hoped, if you withdraw some of the funds.

Here’s more on when and how to cash out a life insurance policy and what you may want to do with the money, if you decide cashing out is the way to go.

On This Page

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  10 Common Reasons People Cash Out or Sell a Life Insurance Policy

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  Cash Withdrawals Vs. Cashing Out a Life Insurance Policy

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  How To Cash Out a Life Insurance Policy

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  How To Sell a Life Insurance Policy

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  Cashing Out a Life Insurance Policy FAQs

10 Common Reasons People Cash Out or Sell a Life Insurance Policy

While it is not advised to cash out a life insurance policy if you have dependents, there are times when other resources may be scarce and you need to tap the cash value of your life insurance policy. Here are some common reasons people cash in their life insurance policies or sell them for up to four times the existing cash value:

• A down payment on a new home
• Renovations
• College tuition for kids or grandkids
• Medical expenses for self or loved one
• Terminal illness and related expenses
• Financial hardship
• Investment opportunities
• Supplemental income
• Unforeseen expenses
• A business venture or legacy
• Premiums on the policy are too high
• Dependents are grown
• Home is paid off
• Travel

Cash Withdrawals Vs. Cashing Out a Life Insurance Policy

Cashing out or surrendering a whole or permanent life insurance policy, or even selling it to an insurance settlement company, is very different from withdrawing cash and allowing the policy to stay active. Let’s take a look at three options to get the money you need.

Withdrawing Money From a Permanent, Universal Life or Whole Life Insurance Policy

You may want to consider taking out some cash but leaving behind enough so that the policy pays its own premiums. A life insurance cash value can pay your premiums for you. Or, you can take out as much cash as you need but continue to make monthly premium payments to keep the policy active so that you can leave behind a death benefit for your loved ones. Keep in mind that premiums increase as you age.

If you withdraw more than the premiums you’ve paid for the policy thus far, the remainder will be subtracted from the death benefit. With that said, beneficiaries never get more than the death benefit so you may want to withdraw the amount which is the sweet spot, where you get some cash on hand without decreasing the death benefit.

Cashing Out a Life Insurance Policy

When you take out all the cash value from a life insurance policy, also called surrendering a policy, you will not leave behind a death benefit. There will be surrender fees, and you will also pay taxes for the cash value minus the premiums paid into the policy. You will not receive the death benefit amount, which is separate and void if you cash out.

Selling a Life Insurance Policy to an Insurance Settlement Company

If you decide to cash out your life insurance policy, consider selling a policy to an insurance settlement company because you may get up to four times what you’d get from your current insurer.⁽¹⁾ You’ll actually get a sum that is larger than the cash value of your policy, but you may have to continue making payments.

Even term life insurance policies can be sold to an insurance settlement company, who will pay you a lump sum in exchange for ownership and beneficiary rights.

One other reason you may want to consider a settlement company is if the policy’s cash value is depleted. You won’t get anything if you cash it out, but you may get some money if you go to a third-party settlement company.

It’s important to shop around when selling a policy.

Reputable Life Settlement Providers

There are many life settlement providers, and these are just a few. It’s a good idea to check in with your state’s Department of Insurance about the company’s reputation before selling your policy to that settlement company.

• Abacus Settlements, LLC
• Apex Settlement Group LLC
• Berkshire Settlements, Inc.
• CCA Settlements, LLC
• Coventry First LLC
• Eagil Life Settlements, LLC
• Encore Life Settlements LLC
• FairMarket Life Settlements Corp.
• Habersham Funding, LLC
• Institutional Life Services, LLC
• Life Capital Group, Inc.
• Life Equity LLC
• Life Settlement Solutions LLC
• LifeRoc Capital, LLC
• LifeTrust, LLC
• Lighthouse Life Solutions, LLC
• Magna Life Settlements, Inc.
• Maple Life Financial, LLC
• Montage Financial Group, Inc.
• The Settlement Group, Inc.
• Spiritus Life, Inc.
• Vespera Life, LLC

How To Cash Out a Life Insurance Policy

Whether you want to take out a loan, withdraw some of the money or surrender the policy entirely and stop making premium payments, you’ll need to contact your life insurance company.

Remember that you can keep the policy active if you take out a loan or withdraw only some of the cash value, as long as you keep making payments. You may reduce the death benefit by making a withdrawal or not paying back a loan.

Cashing out (or surrendering) the policy will mean that you lose life insurance coverage and all rights to the death benefit.

If you are taking money from what’s called the “basis,” which is what you’ve paid into the cash account through premiums, you can withdraw it tax-free. You’ll have to pay taxes on gains (anything over the basis) at your ordinary income tax rate.

For example, if you have $100,000 in cash value and $60,000 of that is your basis, you could withdraw $60,000 tax-free. If you withdraw more than that, you’ll have to pay taxes on the gains on everything over $60,000.

How To Sell a Life Insurance Policy

To sell a life insurance policy to a settlement company, you must typically be 65 years old or older. You may be able to sell your policy if you’re younger, but only if you have certain health issues. It’s always easier getting a settlement the older you are, because settlement companies prefer a shorter life expectancy. The shorter the life expectancy, the more you may get.