There are two common questions that are asked about whole life insurance. The first is whether a permanent policy can be cashed in, and the second is whether it should be cashed in.
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Table of Content
Can I Cash In A Whole Life Insurance Policy?
Whole life insurance accumulates cash value. This means that it accrues a cash value in a separate account to the death benefit. This cash value can be withdrawn at any time.
So yes, a whole life insurance policy can be cashed in.
Should I Cash In A Whole Life Insurance Policy?
This is a far more complicated and vital question to answer. Just because whole life policies can be cashed in does not necessarily mean that they should. The amount that is cashed in is deducted from the death benefit which means that the policy will pay out less in the event of death should the amount withdrawn from the policy not have been repaid in time.
Remember that cash value withdrawals are not free of charge, and interest will be charged on the amount that has been withdrawn. If the amount is not paid back, interest will continue to accrue. This and the tax implications should be taken into account before deciding to withdraw.
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Whether or not to cash out depends mostly on an individual or personal circumstances or events, and the decision may differ significantly from one person to another. For each, the following factors should be taken into account before cashing out:
1. The Cashing Out Options
There are three options available when deciding to cash out or cash in a whole life policy:
Surrendering
Surrendering the policy for the cash value means that the policy will be canceled immediately upon cashing out. Under most circumstances, it is not recommended to surrender policy to access the cash value during life.
Borrowing
Borrowing against the cash value of the policy allows you to lend an amount that has become available for withdrawal basically. Borrowing is normally only allowed when a specific cash value has been achieved or when the policy has reached a specified date of maturity.
This may seem like an excellent alternative to applying for a regular loan as the loan amount does not need to be repaid. However, the amount will be deducted from the death benefit reducing it permanently. This option is typically only recommended if the “loan” amount can be repaid to prevent it from permanently lowering the death benefit.
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Withdrawing
Withdrawing is similar to borrowing, although the cash value or gains of the policy can be accessed at any time. The downfall is that accessing the profits of the policy means that the amount will be taxed. Although the amount does not need to be repaid, it may in some cases, reduce the death benefit permanently.
It is essential to be aware of the tax implications of withdrawing from a policy and whether or not it will permanently decrease the death benefit. Where the death benefit is not affected, removing from a whole life policy may provide greater benefits than getting finance through other channels.
2. Reasons For Withdrawal
There are some reasons for withdrawal that are simply better than others. It is essential to evaluate each reason to determine whether the benefits outweigh the disadvantages of withdrawal.
- Financial difficulties are the most common reason for cash value withdrawal but are, however, not always a good reason. Assess your long and short term needs carefully and make sure that you will be able to repay the withdrawn cash value to reestablish the full death benefit and avoid interest/tax implications.
- Switching from whole life to term life insurance is a viable reason to surrender a cash value policy. Term life is less expensive but does not accrue cash value.
- Investing the cash value in other avenues is considered to be a wise choice. However, it is recommended to only do this later in life when the death benefit is no longer as significant as it once was.
It is not the best decision to access the cash value to buy assets or pay for a holiday or simply to benefit from the policy during life. Unless the policy has become entirely redundant, it is never a good idea to surrender it and it is recommended to get advice from a qualified life insurance consultant before borrowing or withdrawing.
