For those who are in need of extra cash, there may be options available that you might not be aware. You can use the cash surrender value of life insurance to pay bills, address medical expenses or use in case the unexpected occurs. For many, having cash surrender value life insurance may be the answer to a situation that otherwise might overwhelm your finances.
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For many, taking cash value from whole life insurance is an option that often gets overlooked, but it is there just in case you run out of options. There are certain advantages and disadvantages to tapping the money from your life insurance, but in some cases, it may be the best choice under the circumstances.
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What is the Cash Surrender Value?
Put simply; it is the amount of money that an insurance company will pay to you, the policy or annuity holder when the policy is voluntarily terminated before it reaches its full maturity or the events covered by the policy occur.
In essence, the surrender value of life insurance is the savings part of the policy that is used by people around the world who have these particular policies. This is especially prevalent in whole life insurance policies which incorporate a cash value, policy holder’s equity or surrender value.
How long does it take to rise cash value?
It takes time for the cash surrender value to rise as the money needs to build up in the policy first before it can be withdrawn. Generally speaking, it takes about two years just to get a substantial amount of money finally into the life insurance. An elderly needs to purchase a coverage early in order to get enough time to raise the cash value.
In some cases, you can even borrow money against the policy as well depending on the circumstances. However, the money must be repaid while the holder of the policy is still alive. Otherwise, it will be drawn out from the death benefit.
How to Calculate the Cash Surrender Value of Life Insurance?
Essentially, the life insurance cash surrender value is going to be less than the face value of the policy or the death benefit. By deciding to take the cash surrender value, you will terminate the policy at that point. It is possible however that you may earn more income from the earnings that the premiums are providing which may entitle you to dividends.
To accurately calculate the amount, the first step is to go over the amount of premiums you have made each month. This is the base value that you can remove from your life insurance policy without having it taxed. The next step is looking at the amount of dividends that you have earned over that time. This information should be made available to you by the insurance agency.
If you want a ballpark figure, just take your regular monthly insurance payment and times it by the number of months that you have been paying. That should give you a minimum amount and from that you can make the initial consideration about cashing out your policy.
Is Cash Surrender Value on Life Insurance Taxable?
Up to a point, the surrender value of life insurance is not subject to tax. This means that there will not be any tax on the amount you have received that is up to the sum of the premiums you have paid. However, it will be minus the sum of the dividends that is earned from the carrier during the life of the policy itself. So basically, because you have used after tax money to pay the premiums, you will not have that money taxed again.
Taking a loan:
However, money earned by dividends is taxable and the only way to avoid that is to take out a policy loan that uses the cash value as collateral. Otherwise, when you cash out the policy, you cannot take any of the dividends that have been earned unless you pay taxes on them.
If you have received significant dividends on the life insurance policy, it is best to consult with the insurance agent to get a full view of your tax situation in case you decide to cash out the policy.
There are certainly several implications for tapping the cash surrender value of the policy. You will want to take these suggestions into account before taking any action.
Again, be sure to consult with your life insurance agent, so you know all the implications of your particular policy.
Termination of the Life Insurance Policy: This means that once you cash out the value, the life insurance policy is now terminated. Depending on your circumstances, this may not be the best course of action if it’s the only life insurance policy you have.
Taxation: If you receive money from the dividends earned during the life of your policy, then you will be taxed on them. This means that your life insurance agent will have to provide information on just how much was earned through dividends. Depending on your policy, you may be able to withdraw only the premiums that you put in to avoid a tax issue.
Surrender Charges: Many life insurance policies have surrender charges that come into effect which generally come out of the cash value itself. This means that you will need that information as well to make the best-informed decision about cashing out your life insurance policy before you take any action.
What are the Other Options?
You do have alternatives that start with taking out a loan and using the life insurance policy as collateral. This may be the best course of action for you if only a small part of the money is needed or you need an amount that includes the dividends. You have other options as well, so be sure to take that all into account before making the final decision.
What Happens to it at Death?
When you die, the life insurance company gets the cash value of the policy while the death benefit is paid out to your beneficiaries. This is different from term life insurance. Term policies pay a benefit if you die at any time during the policy term. Permanent life insurance will cover you no matter when your death occurs.
Permanent life insurance builds cash value in an account, too. With these policies, you can borrow the cash or withdraw it to use as you like. If you do have a loan outstanding on such a policy at the time of your death, this loan reduces the benefit amount to a beneficiary. Non-loan withdrawals, it should be noted, are taxed at your regular income tax rate.
One use for cash value in policy is to use it to pay the premiums. This means that you need to wait for the cash value to build up but once it does your policy premiums are paid up.
You should use caution when using the cash in a whole life policy. You do not want to get into a difficult tax situation, but you also do not want the cash value to go unused. After all, it will get absorbed by the insurance company at the time of your death. Cash value can be good for younger people to have, however.
Older individuals will want to use more care not to build up cash that they can never get to use. If you have a whole life policy with a cash value that is substantial, you can avoid this problem by asking the insurance company for a higher value for the death benefit in exchange for your policy’s cash. For more information, contact your life insurance agency.
The Bottom Line:
All things considered, when you calculate the cash surrender value of life insurance, the benefits will usually outweigh the concerns if you have made the proper preparations. Always consult with your life insurance agent and weigh all the options before taking action. You can apply for free life quotes from us to make sure you obtain the most affordable deals in the market.