In times of financial trouble, it is understandable for a person to consider cashing out a life insurance policy in order to come up with some extra funds right when you need them the most. Once you cash out a life insurance policy it will be gone, forever. Fortunately, there are some options that you can choose other than cashing out your life insurance policy.
I recently cashed out an old life insurance policy. I didn’t decide to do this until I had a new life insurance policy in place, that was going to meet my family’s needs much better than the old policy would. In other words, cashing out the old policy wasn’t going to leave my family in the position of having no financial support whatsoever from an insurance company after I died. I would not recommend cashing out a life insurance policy if you do not at this moment have a second policy that would take care of your family in place of the old life insurance policy.
Instead of cashing out your life insurance policy, you could take out a loan against the policy. In order for this option to be a possibility, you would have to have an existing life insurance policy. You cannot apply for a policy, and then immediately take out a loan as soon as you get through the approval process for the policy. This is because the cash value of the policy accrues over time. The longer that your policy has existed, the more cash value it will be worth.
One advantage of taking out a loan against your life insurance policy is that the policy itself will continue to exist. The funds that you get from the loan are not taxable. Unlike other kinds of loans, the loan against your life insurance policy isn’t going to have a set repayment schedule. However, one disadvantage to keep in mind is that the loan is going to accrue interest until it is completely paid back. If the policyholder dies before the entire loan is paid off, the remaining amount will be subtracted from the death benefit. This could leave your family with a lot less money than you originally planned on.
Another option is to withdraw some funds from the cash value of the life insurance policy. If you withdraw more than the amount of premiums that you paid into the policy, then the amount is subject to income tax. If you don’t withdraw more than that amount, then it isn’t subject to income tax. The advantage is that you can access those funds right now, when you need them. The disadvantage is that the death benefit will be reduced by the amount of money you took out.
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