How Cashing Out Whole Life Insurance Works
Cashing out a whole life insurance policy is the same as cancelling (also known as “surrendering”) the coverage. When you do that, the insurer will pay out the cash surrender valueCash Surrender Value
The amount of money refunded to the policyowner upon cancelling (aka "surrendering") the policy. The surrender value is generally equal to the current cash value or very close to it., which is essentially equivalent to the cash value balance less any surrender charges (surrender charges vary by insurer).
Whole life policies rarely start accumulating cash value until the two-year mark. Should you surrender before cash value has accrued, there would be nothing to “cash out”. You would just be cancelling the coverage.
It’s vital to understand what cashing out a whole policy is not:
- You are not receiving a refund of any premiums. While the coverage was active, the insurer was on the hook to pay out the death benefit if you had died. This is why you’re not getting a refund of premiums.
- You’re not getting the death benefit or any portion of it. The death benefit (face value) from any life insurance policy is only paid out upon the death of the insured. The only exception to that rule is if you have a policy with a terminal illness rider (most policies include this automatically). This rider entitles you to access a portion of the death benefit. At the same time, you’re still alive in the event you’re diagnosed with a terminal illness and given a life expectancy of 12-24 months.
Whole life cash value charts can give you a good sense of how much money you would receive if you cashed out the policy. Furthermore, every policy will have a clear outline of how much cash value will accrue in each policy year.
Alternative Options Rather Than Cashing Out Your Policy
Let’s say you don’t want to cash out and cancel your whole life policy completely, here are some other options other than cashing it out:
- Policy loan: You can withdraw some or all of the cash value as a policy loan. You’re free to spend the money however you desire. It’s important to note that outstanding policy loans reduce the death benefit. For example, if you borrow $10,000 from your $50,000 policy, the insurer will only pay out $40,000 upon your death. Loans do not have to be paid back, but it’s strongly encouraged that you do. That’s because policy loans accrue interest (usually 3-4%), causing them to continue to increase. Please be aware that some websites will erroneously present you with two distinct options: “policy loans” or “cash value withdrawals”. Both of these are the same thing. When you withdraw cash value, it’s a policy loan. When you ask for a policy loan, you’re withdrawing some or all of the cash value.
- Reduce the death benefit: Some life insurance companies will allow you to reduce the death benefit. If you’re considering cashing out the policy to reduce your bills, this solution would be optimal. You’d still have coverage, and your premium would be reduced since the coverage decreased.
- Sell your policy: It may be possible to sell your whole life policy (called a “life settlement“). Basically, you sell the policy to an investor who becomes the owner and beneficiary. In return, they give you a lump sum of cash. Not all policies are eligible for a life settlement, so don’t count on this option until you’ve researched it thoroughly.
If you need funds in a pinch and would like to retain your whole life policy, here are some other options to get money quickly:
- Personal loan from a bank
- Credit cards
- Home equity loan
- Hardship withdrawal from a 401(k) or other investment
- Sell assets (real estate, cars, other valuable property)
Tax Implications Of Cashing Out A Whole Life Policy
Cashing out the policy and receiving the surrender value will almost never result in a tax liability. The only time taxes would be due is if you have a dividend-paying whole life policy with cash value exceeding the total premiums you’ve paid.
For example, let’s say your current cash value is $25,000, and to date you’ve paid $15,000 into the policy. When you cash out the policy, the insurer will pay you approximately $25,000. The $10,000 difference would be considered income by the IRS and would thus need to be reported on your income taxes.
Frequently Asked Questions
Cashing out a whole life insurance policy is generally not a quick process. You should anticipate it taking 2-4 weeks to receive the money. First, you must contact the insurer to submit your request to surrender and cash out the policy. Some will allow you to fully execute this request via phone, but many will require you to sign a paper form. Once the process is complete, nearly all insurers will mail you a check rather than deposit the money into your bank account.
Cashing out a whole life insurance policy is a good idea only when you no longer want or need the coverage. However, if you still want or need life insurance protection, better options exist, such as borrowing from the cash value or reducing the death benefit. Also, if you simply need funds quickly, you could pursue other avenues, such as a personal loan from a bank or using credit cards.
Term life policies cannot be cashed out since they have no cash value. You’re free to cancel the coverage, but no money will be returned to you.
- Nationally licensed life insurance agent with over 16 years of experience.
- Personal annual production that puts him in the top .001% out of all life insurance agents in the nation.
Anthony Martin is a nationally licensed insurance expert with over 16 years of experience and has personally served over 10,000 clients with their life insurance needs. He frequently authors entrepreneurial and life insurance content for Forbes, Inc.com, Newsweek, Kiplinger, and Entreprenuer.com. Anthony has been consulted as an expert life insurance source for dozens of high-profile websites such as Forbes, Bankrate, Reuters, Fox Business, CNBC, Investopedia, Insurance.com, Yahoo Finance, and many more.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
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life settlement. https://www.finra.org/investors/insights/what-you-should-know-about-life-settlements
