Using Life Insurance Cash Value for Emergencies

A life insurance policy acts as a financial safety net that helps the family members of the policyholder in the event of their sudden death. Although most life insurance policies pay out the insurance amount after the policyholder's death, there are some life insurance policies that provide a cash value component. It means that the insured person can get the benefit during his or her lifetime. In this article, we will learn about the cash value component that some of the life insurance policies offer to their customers. We will also understand the advantages and disadvantages of taking out cash from your policy.  

What Is Life Insurance Cash Value?

Cash value, also known as surrender value, is a feature offered by some life insurance policies. It is the savings amount that is accumulated over time during the policy term and earns interest. It is an additional benefit that comes within the policy apart from the fixed death benefit.

The idea behind offering cash value services is to provide extra benefits to policyholders. It enhances the value of your life insurance policy by providing you with opportunities for loans, policy surrenders, etc. This gives policyholders a sense of relief that they will get financial help in the event of their survival during any mishap or financial emergency. 

Can You Cash Out Life Insurance?

You can take out the cash from a life insurance policy. Life insurance policies like whole life insurance or universal life insurance give you the benefit of withdrawing cash, unlike term insurance policies, where the beneficiaries get money only after the death of the insured person. The amount depends on the type of life insurance coverage and how long you have been paying the premiums. You should note that the cash should be taken out only if you are in a serious financial crisis.

Ways To Take Out Cash from Your Life Insurance Policy

There are several ways to take cash from your life insurance policy. Some of these are:

• Availing a Loan: If you are in financial need, you can avail a loan from your life insurance policy. You can pay back the amount with interest, or the insurer will deduct it from the death benefit that your family will be entitled to receive after your demise.
• Policy Surrender: When you surrender your policy, your coverage ends there. The insured person gets all his or her cash after deducting surrender fees. Note that once you surrender your policy, your family will not get any financial protection in case of your untimely death.
• Money Withdrawal: If you are in dire need of money, you can also make a withdrawal from your policy. You can opt for partial withdrawal or full withdrawal, depending on your needs. In this case, the death benefit will be reduced, and the amount withdrawn will be taxable, plus you will have to pay some penalty.
• Life Settlement: The sale of your policy to some third-party organization or individual person is known as a life settlement. In this case, you can sell out your policy for cash or monetary compensation, but this is only applicable if you are 65 years of age or older.

Pros And Cons of Cashing Out on Life Insurance

Cashing out your life insurance has its own pros and cons.

Pros

• It offers you quick monetary help in case of a financial emergency.
• You don’t have to undergo multiple checks before getting a loan.

Cons

• The death benefit amount will be reduced for your beneficiaries.
• If you surrender your policy, it will cancel your coverage permanently, and your beneficiaries will not get any money.

Do You Pay Taxes When Cashing Out a Life Insurance Policy?

Death benefits or loan facilities provided under a life insurance policy are not taxable, but when you cash out your policy in other ways, you may have to pay taxes under certain conditions. For instance, if you surrender your policy before a certain duration and the surrender value exceeds the premium amount you paid, then the benefits are not tax-free.

Should I Use the Cash Value of My Life Insurance Policy?

You should carefully consider and analyze your circumstances before cashing out your policy amount. If you are in an extreme financial crisis, then you can go for it as it will help you out from that difficult situation. At the same time, it is important to look at the long-term disadvantages, such as the low death benefit amount or tax liability in certain cases. You can always reach out to InsuranceDekho if you find it difficult to make a choice. Our experts will guide you in making the right decision as per your needs and situation.

Conclusion

Cashing out a life insurance policy can provide you with financial support during crises. But the decision to opt for this facility should be carefully considered. Evaluate the advantages and disadvantages of cashing out, and then make the decision that suits you best. Consulting a financial advisor can resolve your doubts and help you make the right decision.

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