Introduction
Everyone should know the risks
associated with life insurance, but when it comes down to it, most people don't
take the time to actually research the topic. If you are like most people and
simply don't know what's involved in cashing out a life insurance policy (which
was designed for regular Americans), then this article can help you make an
educated decision about whether or not you should cash out your death benefit.
Why
You Might Want to Cash Out Your Life Insurance Policy
You might be surprised to learn that
you can cash out your life insurance policy — but it's true.
Why would anyone want to cash out
their life insurance policy? There are several reasons. Let's take a look at
some of the main ones:
You'd like to use the funds for
other purposes. For example, maybe you have a college fund or a retirement
account that's just sitting there. If you have access to money in your life
insurance plan, it could be used for these purposes instead of having to borrow
from other sources.
You want to downsize or move into a
smaller house with less space. Sometimes, this is necessary when you have grown
children who are no longer living at home with you and need their own
space. You might also consider downsizing if you're planning on retiring soon
and don't want to move into an apartment or retirement community.
You want to get rid of debt more
quickly than paying off loans from your mortgage or car payments would allow
for. A life insurance policy will pay off debts faster than selling off
investments, so cashing out is definitely an option worth considering if you're
looking for ways to reduce debt quickly (especially if the amount of coverage
is large enough).
Cash-Out
Options for Your Life Insurance Policy
If you've got a life insurance
policy, you might be wondering whether it's wise to cash out your policy. The
answer is: It depends.
A cash-out option is an option that
allows you to convert your term and whole life policies into a lump sum payout.
There are two types of cash-out options:
Term Cash-Out
Term cash-outs are the most common
and allow you to take out a lump sum payment at the end of a term. You can
choose how much you want to receive and when you want it, as well as whether or
not you'd like to leave your premiums in place for future payments if there's
still time left on your policy's term (usually five years).
Whole Life Cash-Out
Whole life cash outs allow you to
take out a single sum of money at any time during the term of your policy —
even after it has ended. This means that if your insurance company wants more
money from you than what they originally paid for the policy, they can simply
hike up premiums and collect more than they originally paid for its coverage —
without having to wait until the end of its term before collecting additional
premiums from you.
Are
There Alternatives to Cashing Out Your Life Insurance?
Most life insurance policies
automatically convert to cash value policies when you die. However, there are
other ways to get the money out of your policy that is less stressful than
cashing it out.
Here are some alternatives to
cashing out your life insurance policy:
Pay for the death benefits yourself.
If you have enough life insurance coverage, be sure to pay for the death
benefits on your own. The process may seem daunting, but there are many
companies willing to help you through it. The company will take care of
everything from collecting the death benefit check from your estate or
beneficiary to depositing it into an account for you.
Give away some of your assets as
part of a qualified charitable donation. You can donate cash or other assets
such as stocks, bonds and property in exchange for a tax deduction that reduces
the amount of federal estate taxes owed by your heirs. The value of these
donations is subject to income limits and varies depending on how much you give
away each year.
Transfer ownership in the policy or
underlying contract (such as an annuity contract) to another person or
organization without selling it outright. This type of transfer is called an
irrevocable assignment.
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