Introduction
Ten years after purchasing your life insurance policy, you may wonder if you can still cash out on it. The answer to this question depends on the type of policy you have and the company that sold it to you.
Some policies do allow you to withdraw money before the term ends, but other companies won’t let their customers take any money out until they reach the age of 65, no matter how many years have passed since they first bought their plan. This guide will help you understand when you can begin withdrawing from your life insurance policy, no matter what type of coverage you have purchased.
1) How does it work
Life insurance can be a great way to protect the people you love in case of an untimely death. The life insurance proceeds provide financial protection for your loved ones and you can even specify what type of beneficiary should receive the money, such as children or a spouse.
The ten-year term policy provides an income tax deduction if paid in cash instead of a payment arrangement at year-end. But if you're ready to get back on your feet and start making payments again, sometimes this tax benefit isn't worth cashing out early.
2) Is it tax-free
Some people might not even know they have life insurance. If it's more than 10 years old, you could cash it out and use the money for anything you want. The earlier you get this policy cashed out, the more likely you'll get a check instead of cash on deposit in an investment account.
In general, taxes are deferred until the money is withdrawn from these accounts, so if that's what happens when your policy matures, then cashing out will result in a tax-free return of principal. Cashing out does not trigger any taxes if there is no taxable gain (for example, because your investments were all lost), but there may be ordinary income tax if you have capital gains or other investment income as well as life insurance proceeds.
3) Is it taxable
If you cash out a life insurance policy after 10 years, it's probably not wise to just assume that it is tax-free. There are so many factors to consider and understand before doing this because there may be penalties on the cash or income taxes that you owe at year-end.
For example, if the policy value was used as income replacement and the policy was held for less than 10 years, the long-term capital gains rates apply. With that in mind, I would advise you to consult with a qualified tax advisor or accountant before making any decisions.
4) What happens if I die before the end of the policy?
If you die before the end of your life insurance policy, there will be a death benefit to cover the loss. The insurance company will need proof of death (usually with a certified copy of the death certificate) before they will pay out any benefits.
They might also request an updated medical exam, which they can use to determine if the cause of death is due to anything that would have made them reject your application. They may refuse payment if this is the case.
5) When can I start withdrawing funds
If you cash out a life insurance policy, you could lose the death benefit. If the term of your life insurance policy is ten years or less, you can't withdraw any funds without paying surrender charges.
The 10-year penalty also applies to term life policies if they're over 20 years old. After that point, these rules don't apply, but there are other reasons not to cash out a long-term plan. For example, long-term plans have much better rates than short-term plans because companies assume that a person has health issues and will live for less time.
Additionally, since a person usually signs up for ten years or more in advance, it becomes quite expensive to replace the coverage once you stop making payments and cancel your coverage
6) Will The Agent Drop Me For Cashing Out My Policy Early?
There is a standard 10-year period after purchasing a life insurance policy in which the customer cannot claim any proceeds. The penalty for cashing out early could be that an agent might try to raise your rates or refuse to insure you in the future.
Many agents offer this 10-point renewal clause when they sell their policies because they don't want customers claiming their money too soon, but there are exceptions.
The Benefits of Cashing Out Early (six sentences)
Cashing out early may not be for everyone, but can be advantageous for some, says Jim Pensione, Senior Vice President and Chief Marketing Officer at North American Financial Corporation.
7) Consider using your 401(k) and IRA before cashing out your life insurance policy
Before you cash out your life insurance policy, it's important to weigh the pros and cons of doing so. For starters, there may be penalties for withdrawing from a policy before age 59 1⁄2 unless you're permanently disabled.
These penalties vary from insurer to insurer and will include any surrender charge (often 10-20% of the face value) as well as income tax due on the premiums paid back to you. If this sounds hefty, consider other ways of accessing your funds.
A traditional retirement account like a 401(k) or IRA, for example, may allow penalty-free withdrawals at age 59 1⁄2 and beyond if it was originally funded with pre-tax dollars.
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