Can you cash out a whole life insurance policy before death?
Can you get money from your life insurance policy if you're still alive? In some cases, the answer is yes. But keep in mind that we aren't talking about the full stated value of the policy. In other words, if you're covered by a policy worth $25,000, you can't “cash out” your life insurance and get $25,000.
The cash value in your whole or universal life insurance policy can come in handy when you need funds for large, ongoing or unexpected expenses. There are four ways to get the cash from your policy while you're still alive: borrow, withdraw, surrender, or sell.
Generally, you can cash out life insurance if you have a policy that has accumulated cash value. This can be a permanent life insurance policy or a convertible term life policy. But the idea is the same: There has to be some cash value in the policy for you to be able to withdraw it.
However, your life insurance policy won't pay out in the same way it would for a terminal illness if you simply need money to carry out essential home repairs. If you have term life insurance coverage, you won't be able to cash in your policy for any other reason than the ones outlined in your policy documents.
- Take out a loan. ...
- Withdraw money from cash value. ...
- Surrender the policy for cash.
You can cash out a life insurance policy. How much money you get for it will depend on the amount of cash value held in it. If you have, say $10,000 of accumulated cash value, you would be entitled to withdraw up to all of that amount (less any surrender fees). At that point, however, your policy would be terminated.
How fast does cash value build in life insurance? Most permanent life insurance policies begin to accrue cash value in 2 to 5 years. However, it can take decades to see significant cash value accumulation. Consult a licensed insurance agent to understand the policy's cash value projections before applying.
The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value. However, a permanent life insurance policy might.
In most cases, cash value life insurance isn't taxable. Your beneficiaries can receive the death benefit as a lump sum tax-free, though they won't receive your cash value balance. As a policyholder, you'll typically only pay taxes on the cash value if you take out more money than you put in through premiums.
The good news is that you likely won't need to worry about having a claim denied if you're truthful with your life insurance company from the start. Instances of lying, criminal activity, or dangerous behavior that's not disclosed upfront could all be reasons life insurance won't pay out.
Can I use my life insurance to pay off debt?
Yes, it can be done. If you have the right type of life insurance – whole life or universal life – and have been making on-time payments to it for an extended period, you may have accrued enough “cash value” in the policy to bury your credit card debt.
How long does it take to borrow against life insurance? It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return.
You could potentially take a loan from your policy, withdraw the cash value it's accrued over time, use a living benefit rider or sell your policy. A financial advisor can help you integrate a life insurance policy into your financial plan. Find an advisor today.
Life insurance loans are only available on permanent life insurance policies — such as whole life and universal life — that have a cash value component. You likely can't borrow against a term life insurance policy since it probably doesn't have cash value.
If you want to surrender a whole life insurance policy, DoughRoller notes that “you have to actually call your insurance company to cancel the policy,” (which is unlike a term policy that only requires you to stop paying your premiums).
How can you use life insurance to build wealth? Term life insurance can be used to build wealth across generations by providing a payout to your surviving loved ones. The death benefit can be used to pay estate tax, as well as preserve remaining assets.
- Generally more expensive than term life.
- More complex.
- Policy loans may reduce death benefit or have tax implications.
- Less flexible and potentially lower returns than other permanent life insurance.
A whole life insurance policy is “paid-up” when no further premium payments are needed to keep the policy in force. Paid-up life insurance allows you to benefit from the continued growth of the policy's cash value, without needing to pay into the policy to keep it active.
After the 20-year level term ends, your coverage expires. By outliving your policy, both the death benefit and two decades of premiums are lost. Terms are available in different lengths, typically from 10 to 30 years, so it's important to select one that you think will be sufficient for your financial needs.
Age | Term length | Average monthly rate |
---|---|---|
40 | Term length10 years | Average monthly rate$47.41 |
40 | Term length15 years | Average monthly rate$61.33 |
40 | Term length30 years | Average monthly rate$137.89 |
50 | Term length10 years | Average monthly rate$112.67 |
Is whole life worth it for the cash value?
The cash value rate of return can be low
While whole life insurance offers fixed, guaranteed returns on your cash value, you may earn higher returns with other investments, such as stocks, bonds and real estate.
For people with long-term financial goals that include providing a death benefit for their beneficiaries, whole life insurance is worth considering. While premiums may be higher than term life insurance, the lifelong coverage provides the necessary coverage along with the potential for cash value growth.
When this happens, your beneficiaries lose their inheritance from the life insurance, and you lose the opportunity to use the money again in the future. In addition, if you don't pay the loan back and the amount you borrow reaches the amount of cash value (or exceeds it), you may find yourself owing taxes.
The insurer might request medical records and other documents to evaluate them for any evidence of material misrepresentation on the life insurance application. If your insurer finds evidence of material misrepresentation, the policy could be voided and your beneficiary would not receive a death benefit.
What does life insurance not cover? Life insurance exclusions often include deaths from undisclosed pre-existing conditions, certain risky activities, fraud and intentional illegal acts.
References
- https://www.marketwatch.com/guides/insurance-services/is-whole-life-insurance-a-good-investment/
- https://www.hhs.gov/hipaa/for-individuals/guidance-materials-for-consumers/index.html
- https://smartasset.com/life-insurance/how-to-use-life-insurance-while-alive
- https://www.policygenius.com/life-insurance/insurance-waiting-period/
- https://boonswanglaw.com/life-insurance-claim/happens-someone-dies-shortly-getting-life-insurance/
- https://choicemutual.com/blog/colonial-penn-life-insurance-rate-chart/
- https://www.forbes.com/advisor/life-insurance/colonial-penn-life-insurance-review/
- https://chartrequest.com/how-long-should-you-keep-medical-bills-and-records/
- https://www.jrcinsurancegroup.com/non-guaranteed-vs-guaranteed-life-insurance/
- https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance/
- https://www.usnews.com/insurance/life-insurance/colonial-penn-review
- https://www.quickquote.com/colonial-penn-995-plan-review/
- https://www.iii.org/article/what-are-principal-types-life-insurance
- https://fidelitylife.com/life-insurance-basics/life-insurance-101/reasons-life-insurance-wont-pay-out/
- https://www.cnn.com/cnn-underscored/money/guaranteed-issue-life-insurance
- https://www.ssa.gov/pubs/EN-05-10084.pdf
- https://www.forbes.com/advisor/life-insurance/cash-out-life-insurance/
- https://www.progressive.com/answers/how-long-to-claim-life-insurance/
- https://www.valuepenguin.com/life-insurance/aarp-review
- https://www.dfs.ny.gov/faqs/consumer-life/what-are-some-pros-and-cons-whole-life-insurance
- https://www.nerdwallet.com/article/insurance/colonial-penn-life-insurance-review
- https://www.bankrate.com/insurance/life-insurance/largest-life-insurance-companies/
- https://www.forbes.com/advisor/life-insurance/cash-value-life-insurance/
- https://www.aigdirect.com/guaranteed-issue-whole-life-insurance
- https://www.nerdwallet.com/article/insurance/best-life-insurance-companies
- https://www.insuranceandestates.com/paid-up-life-insurance/
- https://www.progressive.com/answers/life-insurance-types/
- https://www.valuepenguin.com/average-cost-life-insurance
- https://www.policygenius.com/life-insurance/high-net-worth/
- https://choicemutual.com/blog/colonial-penn-995-plan-review/
- https://www.quotacy.com/how-much-does-a-100000-life-insurance-policy-cost/
- https://www.progressive.com/answers/return-of-premium-life-insurance-rider/
- https://www.ftc.gov/business-guidance/resources/consumer-reports-what-insurers-need-know
- https://cfbinsurance.com/2023/08/22/build-wealth-life-insurance/
- https://www.investopedia.com/articles/financial-advisors/111215/why-wealthy-should-buy-lots-life-insurance.asp
- https://www.investopedia.com/articles/personal-finance/093015/life-insurance-vs-annuity.asp
- https://www.aarp.org/membership/benefits/insurance/aarp-permanent-life-insurance-from-new-york-life/
- https://www.policygenius.com/life-insurance/alcohol/
- https://www.cnbc.com/select/no-exam-life-insurance/
- https://www.aflac.com/resources/life-insurance/cash-out-life-insurance.aspx
- https://www.nylaarp.com/FAQ/Products/Guaranteed-Acceptance-Life/Guaranteed-Acceptance-Life-Insurance
- https://www.valuepenguin.com/life-insurance/colonial-penn-review
- https://www.cbsnews.com/news/is-life-insurance-worth-it-for-seniors-heres-what-experts-think/
- https://www.sanlam.com/productcatalog/Pages/about-life-annuities-with-a-guaranteed-term.aspx
- https://www.cnn.com/cnn-underscored/money/term-vs-whole
- https://www.forbes.com/advisor/life-insurance/guaranteed-life-insurance/
- https://chooseterm.com/basics/what-does-suze-orman-say-about-life-insurance/
- https://www.nerdwallet.com/article/insurance/cheap-life-insurance
- https://www.aflac.com/resources/life-insurance/instant-life-insurance.aspx
- https://www.annuityexpertadvice.com/life-insurance/colonial-penn/
- https://www.aarp.org/politics-society/advocacy/info-2022/ways-aarp-triumphed-2022.html
- https://www.rocketmoney.com/learn/personal-finance/life-insurance
- https://www.marketwatch.com/guides/insurance-services/how-to-borrow-against-life-insurance/
- https://choicemutual.com/blog/aarp-life-insurance-rates/
- https://www.investopedia.com/articles/personal-finance/121914/understanding-life-insurance-loans.asp
- https://www.investopedia.com/articles/pf/08/life-insurance-cash-in.asp
- https://www.aflac.com/resources/life-insurance/10-year-term-life-insurance.aspx
- https://www.nerdwallet.com/article/insurance/guaranteed-issue-life-insurance
- https://www.nerdwallet.com/article/insurance/is-whole-life-insurance-good-investment
- https://www.marketwatch.com/guides/insurance-services/20-year-term-life-insurance/
- https://www.thrivent.com/insights/life-insurance/how-to-use-life-insurance-to-build-wealth
- https://search.colonialpenn.com.pagescdn.com/faqs.html
- https://www.aflac.com/resources/life-insurance/term-vs-whole-life-insurance.aspx
- https://www.nerdwallet.com/article/insurance/life-insurance-needs-60s-70s
- https://www.newyorklife.com/articles/senior-whole-life-insurance
- https://www.aarp.org/membership/benefits/best-discounts-and-benefits.html
- https://www.aflac.com/resources/life-insurance/what-happens-when-a-term-life-insurance-policy-expires.aspx
- https://www.progressive.com/answers/converting-term-to-whole-life-insurance/
- https://www.quickquote.com/which-type-of-life-insurance-policy-generates-immediate-cash-value/
- https://www.trustage.com/learn/life-insurance/cash-out-policy
- https://www.marketwatch.com/guides/insurance-services/types-of-life-insurance/
- https://www.incharge.org/debt-relief/debt-consolidation/borrowing-from-life-insurance/
- https://www.quickquote.com/what-is-cash-value-life-insurance/
- https://www.investopedia.com/best-life-insurance-for-people-over-50-4846582
- https://www.nerdwallet.com/article/insurance/life-insurance-underwriting
- https://www.fidelitylife.com/life-insurance-basics/permanent-life-insurance-101/cash-value-life-insurance/
- https://www.marketwatch.com/guides/insurance-services/life-insurance-application/
- https://www.guardianlife.com/life-insurance/withdraw
- https://www.usnews.com/insurance/life-insurance
- https://www.progressive.com/answers/term-vs-whole-life-insurance/
- https://choicemutual.com/blog/jonathan-lawson-colonial-penn/
- https://qz.com/advisor/auto-insurance/aarp-auto-insurance/
- https://www.lhlic.com/consumer-resources/guaranteed-life-insurance/
- https://insuranceproshop.com/make-million-dollars-selling-life-insurance/
- https://www.experian.com/blogs/ask-experian/when-is-it-too-late-to-buy-life-insurance/
- https://www.progressive.com/answers/instant-life-insurance/
- https://www.moneyexpert.com/life-insurance/claiming-life-insurance-while-you-re-alive/
- https://code-medical-ethics.ama-assn.org/ethics-opinions/management-medical-records
- https://www.nerdwallet.com/article/insurance/types-of-life-insurance
- https://www.armstrongarchives.com/retention-and-destruction-of-health-information/
- https://www.quickquote.com/colonial-penn-life-insurance-review/
- https://brainly.com/question/39436417
- https://www.investopedia.com/articles/personal-finance/120115/guaranteed-vs-nonguaranteed-permanent-life-insurance-policies.asp
- https://mslawllp.com/if-my-life-insurance-claim-is-denied-what-are-my-options/
- https://colonialpenn.com/insights/a-guide-to-guaranteed-life-insurance/
- https://hr.gwu.edu/EOI
- https://choicemutual.com/blog/mutual-of-omaha-life-insurance-seniors/
- https://www.ruttermills.com/resource/car-accident-info/should-i-release-my-medical-records-to-an-insurance-company/
- https://smartasset.com/insurance/cash-out-life-insurance
- https://www.marketwatch.com/guides/insurance-services/life-insurance-contestability-period/
- https://www.marketwatch.com/guides/insurance-services/how-does-instant-life-insurance-work/
- https://www.progressive.com/answers/life-insurance-loans/
- https://www.nylaarp.com/Learning-Center/After-you-purchase/Claiming-Life-Insurance-Benefits
- https://www.longtermdisability.net/articles/2020/june/colonial-penn-life-insurance-company-denies-bene/
- https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance-taxable/
- https://stbartsfinance.co.uk/how-long-should-i-get-life-insurance-for/
- https://www.aarp.org/membership/benefits/insurance/auto-life-property/
- https://www.nylaarp.com/Life-Insurance/Permanent
- https://www.investopedia.com/terms/g/guaranteeddeathbenefit.asp
- https://www.forbes.com/advisor/life-insurance/reasons-for-claim-denial/
- https://www2.unitedamerican.com/articles/january-2020/things-to-consider-before-surrendering-a-whole-life-insurance-policy
- https://www.thrivent.com/insights/life-insurance/the-benefits-drawbacks-of-whole-life-insurance
- https://www.fool.com/the-ascent/insurance/life/life-insurance-medical-exam/
- https://www.nerdwallet.com/article/insurance/life-insurance-application
- https://www.investopedia.com/articles/personal-finance/010716/do-you-need-life-insurance-after-you-retire.asp
- https://www.trustage.com/learn/life-insurance/finding-out-beneficiary
- https://www.moneygeek.com/insurance/life/what-types-of-death-not-covered/
- https://www.policygenius.com/life-insurance/guaranteed-life-insurance/
- https://www.marketwatch.com/guides/insurance-services/best-senior-life-insurance/
- https://www.idlawcenter.com/blog/properly-releasing-medical-information-to-insurers.cfm
- https://www.bankrate.com/insurance/life-insurance/lying-on-application/
- https://www.nj.com/personal-finance/article/colonial-penn-life-insurance-review
- https://www.mbc.ca.gov/FAQs/?cat=Consumer&topic=Complaint:%20Medical%20Records
- https://www.policygenius.com/life-insurance/can-creditors-take-my-life-insurance/
- https://www.progressive.com/answers/guaranteed-life-insurance/
- https://www.progressive.com/answers/million-dollar-life-insurance-policy/
- https://www.wsj.com/articles/its-the-hottest-thing-in-life-insurance-are-buyers-aware-of-the-risks-11578047405
- https://www.usnews.com/insurance/life-insurance/when-to-draw-cash-from-life-insurance-policies