Did you know you can sell all or a portion of a life insurance policy, even term insurance?
In tough economic times, people can be left scrambling for cash to meet everyday expenses and lifestyle demands. Among the available options for a source of income, cashing in your life insurance policy can help you and your family stop compromising your goals and meet your daily needs. Cashing in life insurance while you’re still alive is a viable option for policyholders with a policy that they no longer need or can no longer afford the premiums for. Let’s talk about how to cash in a life insurance policy along with other options to receive cash for your life insurance policy.
What is the cash value of a life insurance policy?
Cash value is the portion of your policy that earns interest and may be available for you to withdraw or borrow against in case of an emergency. The types of cash-value life insurance are whole life insurance and universal life insurance. The deposits are held in a cash-accumulation account within the policy.
Cash-value life insurance offers the opportunity to access cash accumulations within the policy through withdrawals, policy loans, or partial or full surrender of the policy.
So, how do you calculate cash value? To calculate the cash surrender value—the total payout an insurance company will pay to a policyholder or owner for the sale of a life insurance policy—you add the total payments made to an insurance policy and subtract the fees charged by the agency.
Consider a policy with a $250,000 death benefit. The policy has no outstanding loans or prior cash withdrawals and an accumulated cash value of $10,000. Upon the death of the policyholder, the insurance company pays the full death benefit of $250,000. Money collected into the cash value is now the property of the insurer. Because the cash value is $10,000, the real liability cost to the insurance company is $240,000 ($250,000 – $10,000).
Another alternative involves selling your policy for cash, a method known as a life settlement.
Can I sell my life insurance policy for cash?
Yes, you can sell your life insurance policy for cash. This is known as a life settlement. The concept is fairly simple. As the policy holder, you can sell your life insurance policy to a life settlement company in exchange for cash. The new owner will keep the policy in force (by paying the premiums) and reap a return on the investment by receiving the death benefit when you die.
Most types of insurance are eligible for sale, including policies with little or no cash value, such as term insurance. Generally, to qualify for a life settlement, you (the insured) must be at least 65 years old, have a life expectancy of 10 to 15 years or less and a policy death benefit of at least $100,000 (in most cases).
The primary advantage to a life settlement is you can potentially get more for the policy than surrendering the policy (cashing it in).
Do you pay taxes when cashing in a life insurance policy?
Although cashing in your life insurance policy can be a great option for some policy holders, there are likely questions to come along first. Many policyholders ask questions about taxes such as “Is the surrender value of life insurance taxable?” or “Do beneficiaries pay taxes on life insurance policies?”
In most cases, your beneficiary won’t have to pay income taxes on the death benefit. But if you want to cash in your policy, it may be taxable. If you have a cash-value policy, withdrawing more than your basis (the money it’s gained) is taxable as ordinary income. The taxation of life settlements is complicated: The general treatment is that gain in excess of your basis in the policy is taxed to you as ordinary income. Be sure you get expert tax advice before signing over your policy.
Get the right advice with Life Settlement Advisors
At Life Settlement Advisors, we provide a life insurance settlement calculator to give our clients a clear, immediate picture of the highest possible value they could get from selling a life insurance policy in a settlement. Qualifying for a life settlement is based on age, how long you’ve had the policy, its benefit value, and other factors. If you are approved, a life settlement can bring a far greater return of your money on the same investment than any surrender value.
Before selling your life insurance policy, there are a few things to consider, such as commission, financial dependency, and public assistance. Read more here to find out what questions to ask before selling a life insurance policy.
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different from selling your car, home, or any other valuable asset that will create immediate cash. Contact us today to learn more.
Life Settlement Advisors