How to Get Money From Your Life Insurance Policy

Life insurance policies primarily provide a financial safety net for beneficiaries after the insured’s death. Certain types of life insurance can also serve as a financial resource during the policyholder’s lifetime. Accessing funds from these policies offers financial flexibility for various needs, from unexpected expenses to long-term care.

Accessing Your Policy’s Cash Value

Permanent life insurance policies, such as whole life or universal life, accumulate cash value. This value grows tax-deferred, becoming a significant asset. It represents premiums invested by the insurer.

Policyholders can make partial withdrawals. Partial withdrawals reduce the policy’s death benefit and remaining cash value. Amounts up to the policy’s “cost basis” (total premiums paid) are usually tax-free. Amounts exceeding this cost basis may be taxable.

A full surrender is another way to access cash value. This terminates the contract for its cash surrender value. It ends coverage and eliminates the death benefit. Surrender charges may apply, reducing the final payout.

When a policy is fully surrendered, any amount received exceeding premiums paid is subject to income tax. To initiate a withdrawal or surrender, contact your insurance provider for forms.

Taking a Policy Loan

Policyholders can borrow directly from their insurer. This is not a bank loan; the insurer advances funds against the policy’s value. The cash value continues to earn interest, though the loan accrues interest at a rate set by the insurer.

Repayment terms are flexible. Policyholders can repay at their convenience, or not at all. However, any outstanding loan balance and accrued interest will be deducted from the death benefit.

Unpaid loan interest can be capitalized, increasing the amount owed. If the loan balance exceeds the policy’s cash value, the policy can lapse. If a policy lapses with an outstanding loan exceeding the cost basis, the excess may become a taxable event.

Policy loans are generally not taxable income as long as the policy remains in force. Their flexible repayment and tax-free nature (if the policy doesn’t lapse) make policy loans a financial tool. Monitor the loan balance and cash value to prevent policy lapse and tax consequences.

Using Accelerated Death Benefits

Accelerated Death Benefits (ADBs) allow policyholders to access a portion of their life insurance death benefit while living. This feature is triggered by specific health circumstances. ADBs help cover medical expenses or living costs during severe illness.

Qualifying conditions include terminal illness (limited life expectancy). Chronic illness (inability to perform Activities of Daily Living like bathing or dressing) is another trigger. Some policies also offer ADBs for critical illnesses.

ADBs are usually a percentage of the total death benefit. The amount received reduces the remaining death benefit for beneficiaries. For example, if $100,000 is accelerated from a $500,000 policy, $400,000 remains.

ADBs are generally tax-free if the insured is certified as terminally or chronically ill. This exclusion helps address financial burdens of severe health conditions. Review policy language to understand conditions and limitations.

Selling Your Life Insurance Policy

Selling a life insurance policy, known as a life settlement, provides a lump sum. The policyholder sells their policy to an investor for more than its cash surrender value but less than the death benefit. The new owner pays premiums and receives the death benefit upon the insured’s passing.

Viatical settlements are a specific type of life settlement for the terminally ill. Eligibility typically requires the insured to be a certain age (e.g., 65+) or have a significant health impairment.

Selling a policy often begins by contacting a life settlement broker or provider. They assess the policy’s value based on death benefit, insured’s health, and premium costs. After an offer is accepted, ownership and beneficiary designation transfer to the new owner, and the policyholder receives payment.

Selling a policy means original beneficiaries will not receive a death benefit. Life settlement proceeds can have complex tax implications.

Proceeds up to the cost basis (total premiums paid) are generally not taxable. Amounts exceeding cost basis up to the cash surrender value are typically taxed as ordinary income. Any proceeds beyond the cash surrender value are generally taxed as capital gains. Due to complexity, seek professional financial and tax advice before pursuing a life settlement.