Most people buy life insurance because they want to provide for their family and cover financial obligations after they die. But so-called cash value life insurance policies have not only a death benefit but an investment account, which is contributed to with a part of every premium payment.
The funds in that account are separate from the death benefit, so your beneficiaries would not receive the cash value if you passed away. It’s essentially an investment that grows tax-deferred with interest, and is available for your use while you’re alive.
We don’t recommend buying cash value insurance only for its investment value; consider both your insurance and investment needs. If you do own such a policy, though, here are four leading options for how you can use the cash in it.
Just make sure that, even if you no longer want coverage, you don’t let your policy lapse. When a policy lapses, you lose the death benefit as well as the cash value you could have been paid.
Pay your premiums
You can use the returns your policy earns to pay--or at least contribute to paying--the premiums on the policy.
This move essentially makes the policy self-sustaining. Assuming there’s a fairly large cash value, and consistent returns, you both keep your coverage in place for years and incur little to no additional cost. For example, say your annual premium is $5,000 and you have $100,000 in cash value. You would just need the policy’s cash value to return a net 2.5% interest annually to cut your premium payments in half while maintaining the full cash value.
You need to carefully balance the premiums that are going out with the earnings that are replenishing the policy. If the cash value is too small, or interest rates are too low, you might eventually exhaust the cash value of the policy, and so lose your policy.
Also, this move is generally an option only with variable and universal life insurance policies.
Borrow against the policy
A life insurance policy loan is just that: a loan from the insurer in which the cash value of your policy is used as collateral. It can be used for paying medical expenses, buying a car or anything else you might need cash for.
The process is simple; you complete a form. Since the insurer has the funds in hand to cover the loan, no underwriting is required, nor is a credit check. Also, you may keep the loan outstanding for as long as you desire, and it doesn’t appear on your credit report, which may be a plus for some. Finally, the loan typically comes with quite low annual interest rates.
The loan must end if and when you die. Should you happen to pass away while the balance is outstanding, its value will be deducted from the policy’s death benefit.
Sell the policy to a third party
It’s also possible to sell your policy through a life insurance settlement. This option is most suitable if your premiums are quite high, and you no longer have dependents or they’re all financially secure.
You’ll receive an amount that’s greater than the policy’s cash value, but less than the death benefit. Once the policy is sold, the life insurance settlement company takes over premium payments and becomes the policy beneficiary.
If the settlement is greater than the amount you’ve paid in premiums, you’ll have to pay taxes. Further, should you opt to use a broker to help to pair you up with a settlement company, that person will also typically take a cut of the proceeds.
You may not find a life insurance settlement company that will take your policy. You also can’t be in a hurry to get your money, since the process of evaluating the policy, to determine if it will be bought, can take several weeks.
Surrender your policy to the insurance company
If you can’t get a settlement and want to cash out your life insurance, you can surrender your life insurance policy to the insurer.
It’s fast and simple. You simply let your insurer know and they will pay you the life insurance policy’s net cash value (you will typically find this figure listed separately in your life insurance statements).
This option isn’t ideal if the policy is fairly new, since the net cash value will generally be lower than the total cash value during that period, due to fees and surrender charges. However, if you’ve had your policy in place between 10 to 15 years, the net cash value is likely to be close or equal to the total accumulated cash value.