So you took out a life insurance policy, maybe years ago, and now you need some cash. Turns out, you can tap into the funds you’ve built up in certain types of policies without canceling your coverage. Crazy, right? But how does it work? Can you take money whenever you want or are there rules? Before you pick up the phone to call your agent, read this first to understand your options, the pros and cons, any tax implications, and the step-by-step process. You’ll learn how to withdraw money from your life insurance policy the smart way.
Is It Possible to Withdraw Money From a Life Insurance Policy?
It is possible to withdraw money from most life insurance policies. This is known as “withdrawing the cash value” or “cashing in” your policy. The cash value is the amount of money that has accumulated in your policy over time. As long as your policy has been active for a certain time, typically a few years, you are entitled to withdraw some or all of this cash value.
To withdraw money from your life insurance policy, you will need to contact your insurance provider to request a withdrawal or surrender of part or all of the cash value. They will walk you through the necessary paperwork to process your request. Some things to keep in mind:
- There may be fees or penalties for withdrawing money early, especially if done within the first few years of the policy. Make sure you understand any charges before proceeding.
- Withdrawing money will reduce your policy’s death benefit and cash value. The more you withdraw, the less will be paid out when you pass away.
- You may have to pay income taxes on the amount withdrawn. Consult a tax professional to determine your liability.
- If you withdraw too much, your policy could lapse or be terminated by the insurance company. Only withdraw amounts that won’t put your coverage in jeopardy.
- Interest rates and investment returns in your policy may be better than what you can earn elsewhere. Think carefully before withdrawing funds for short-term needs.
- You can often borrow money from your policy at a low-interest rate instead of making a withdrawal. This allows your money to continue earning returns in the policy. Borrowed amounts are deducted from the death benefit, but as long as you repay the loan, your coverage can remain intact.
As with any financial decision, make sure you understand all aspects of withdrawing money from your life insurance policy before proceeding. If done responsibly, accessing your policy’s cash value can be an easy way to get funds when you need them. But be cautious and think long-term to avoid negatively impacting this important financial safety net.
How to Withdraw Money From a Life Insurance Policy
So you’ve been paying premiums on a life insurance policy for years and now find yourself in need of some of that money. The good news is, that most permanent life insurance policies like whole life or universal life allow you to withdraw a portion of your cash value—the amount your policy has accumulated over time—while still keeping the policy active. Here’s how to tap into your policy’s cash value:
Check Your Policy Details
First, review your specific policy details to determine if withdrawals are allowed and any limits or fees that may apply. The cash value and any withdrawal amounts will be outlined in your policy documents. Contact your insurance agent or company directly with any questions.
Determine How Much You Need
Decide how much of the cash value you need to withdraw. Keep in mind that any money taken out will reduce your policy’s death benefit and cash value growth over time. Only withdraw what you need.
Choose Between Loans and Partial Surrenders
You have two options for accessing your cash value: policy loans and partial surrenders. Loans allow you to borrow money from your policy at a fixed interest rate. You must repay the loan to avoid reducing your death benefit. Partial surrenders permanently reduce your cash value and death benefit. Consider your needs and ability to repay before choosing.
Apply for Your Withdrawal
Contact your insurance company to request a withdrawal from your policy’s cash value, whether a loan or partial surrender. Provide the specific amount you want to withdraw and any details needed to process your request. The money can typically be deposited directly into your bank account within a few business days after approval.
Repay Any Loans (if Applicable)
If you took a policy loan, repay it as agreed to avoid interest charges and decreases to your death benefit. Make loan repayments promptly and continue paying your regular premiums to keep your policy active. Any unpaid loan balances at the time of your death will be deducted from the death benefit paid to your beneficiaries.
Withdrawing money from a life insurance policy is often a last resort, but can be an important financial lifeline in times of need if used responsibly. Follow these steps and be sure to understand all the details of your specific policy to make the most informed choice.
Advantages of Withdrawing Money From a Life Insurance Policy
If you have money tucked away in a life insurance policy, there are some benefits to withdrawing funds from it.
Access Your Money When You Need It
Life insurance policies are meant to provide financial protection for your loved ones if something were to happen to you. However, you may find yourself in a situation where you need access to those funds while you’re still alive. Withdrawing money from your life insurance policy allows you to get money when you need it most, such as paying for medical expenses or funding your child’s education.
Potentially Higher Returns
The cash value in a life insurance policy usually earns interest at a fixed rate. Although your money is very safe, the returns are often quite low. By withdrawing money from your policy, you have the opportunity to invest it elsewhere where it may generate higher returns over time. For example, you could invest in the stock market or real estate where returns have historically outpaced most savings accounts and CDs.
Reduce Premium Payments
Withdrawing money from your life insurance policy also reduces the death benefit, which in turn lowers your premium payments. If your needs have changed since purchasing the policy, reducing coverage can save you money each month that would otherwise go towards premiums. The savings can add up over the lifetime of the policy.
Of course, withdrawing money from your life insurance policy also has some potential downsides to consider like reduced coverage, surrender charges, and tax implications. However, for many policyholders, the benefits of accessing funds, increasing returns, and lowering costs make withdrawing money the right choice. By understanding all your options, you can make the most informed decision based on your financial situation and needs.
Disadvantages of Withdrawing Money From a Life Insurance Policy
Withdrawing money from your life insurance policy may seem tempting, but there are some significant downsides to consider before you cash out.
- You’ll lose the policy’s cash value accumulation. The money you withdraw can no longer benefit from tax-deferred growth and compounding interest.
- Your death benefit will decrease. The total payout your beneficiaries would receive upon your passing will be reduced by the amount you withdraw.
- You may face surrender charges. Many policies charge fees if you withdraw money within the first 5-10 years. These charges often amount to a percentage of your withdrawal.
- Taxes may be due on your withdrawal. Unlike the death benefit, withdrawals from a life insurance policy are usually not tax-free. You’ll typically owe income taxes on any money you take out.
- Your rates may increase. If you withdraw a sizable amount, the insurance company may see you as a higher risk and raise your premiums. They need to ensure they still make a profit from your policy.
- You could lose certain riders. Additional benefits like the accelerated death benefit rider may be voided if you decrease the death benefit through withdrawals. Check with your insurance provider for specifics.
While tapping into your life insurance policy cash value may seem like an easy solution in a financial pinch, it often ends up costing you more in the long run. Unless necessary, it’s best to leave your policy intact so it can continue to provide tax-advantaged growth and essential coverage for your loved ones. If you do need to withdraw money, do so judiciously by only taking what you need.
Conclusion
So there you have it – understanding how to withdraw money from your life insurance policy is doable, even if it seems confusing. Just remember the key steps we covered: determine if you have a cash value policy, figure out the available withdrawal amount and any fees, check your policy contract for specific rules, submit required forms to the insurer, and carefully consider impacts to death benefit and policy costs before taking action. With some planning, you can tap into your policy’s cash value and put those funds to good use. The process may take a bit of effort but you’ve got this. Feel empowered to access those funds in a financially savvy way.
