5 ways to cash out your life insurance policy while you’re alive


Life insurance provides financial security for your loved ones in the event of death, but you may be able to cash out your policy while you are alive. (iStock)

Life insurance provides financial security for your loved ones in the event of death, but you may be able to cash out your policy while you are alive. Whether you need a lump sum to pay for your education or a down payment for a house, tapping into your life insurance policy can help you reach your financial goals.

Read on to find out how to use your life insurance coverage today. And if you’re looking for life insurance with living benefits, it’s important to understand how it works. You can compare life insurance policies in Credible’s online financial products marketplace.


1. Take advantage of your policy’s living benefit riders

Some types of life insurance come with additions to the policy called “endorsements”. These riders may provide living benefits that apply if you meet certain criteria. Here are some examples of living benefit riders:

  • You are diagnosed with a chronic, terminal or serious illness – You may be able to withdraw up to 80% of the proceeds from your policy to cover health care expenses through sickness endorsements.
  • You need long-term care – Nursing homes, palliative care and end-of-life services are extremely expensive. Long-term care riders can help cover these expenses.

Not all life insurance policies have these living benefits, and coverage with policy additions such as benefit riders may be more expensive. This is why it is important to compare the plans as well as the premiums before committing to a policy. You can buy life insurance for free (and without a credit check) on Credible.


2. Take out a loan from the cash value of the contract

A life insurance policy loan uses the cash value of your plan as collateral. Since you borrow money from yourself, life insurance loans:

  • Does not require a credit check
  • Have relatively low interest rates
  • Can offer flexible repayment terms

In addition, the loan is technically not income, so it is tax free.

Not all life insurance policies allow loans, so you will need to contact your insurance company to see if your policy does.


3. Make a withdrawal from the policy

In addition to borrowing against your life insurance policy in the form of a loan, you may be able to simply withdraw cash value from your policy.

There are a few drawbacks to withdrawing from your life insurance policy early compared to loans, although it does reduce the value of the death benefit. This leaves your loved ones with less money to cover funeral costs and living expenses upon your death.

You may also have to pay taxes. If you withdraw more than the value of your policy, the IRS will treat that amount as income.

4. Abandon the policy to receive the accumulated value

Surrender of your life insurance policy allows you to withdraw the full cash value and voids any future coverage. You will receive the money you paid for the coverage plus interest. But you may need to pay surrender charges and federal income taxes on the amount, so you’ll need to compare your options based on your policy and its cash surrender value to see if it’s worth it.

If you are considering purchasing life insurance, compare the coverage options and surrender charges on Credible.


5. Sell your life insurance policy to a third party

Life insurance brokers buy life insurance policies for cash, but the total amount is usually significantly less than the death benefit. Plus, the payment comes with income taxes and fees, making it a more expensive option than loans and withdrawals.

The biggest downside, however, is that you won’t have life insurance coverage. This leaves your beneficiaries without payment when you die.

You can search for the right life insurance company for you on Credible.

Have a finance-related question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.

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