Paying monthly life insurance premiums can become a burden for policyholders facing money constraints. This feeling is made worse by the realization that life insurance benefits can only be availed after the death of the policyholder. however, one fact that many policyholders don’t realize is that they can collect on life insurance before they die.
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In tough financial times, people sometimes struggle to come up with cash to meet their expenses and lifestyle demands. In situations like these, policyholders may consider cashing in their life insurance as a solution to a financial crisis. While cashing in your life insurance policy is a big decision that can have a significant influence on your financial life, sometimes it becomes a necessity.
To help you determine if you should cash in on a life insurance policy, we’ll explain everything you need to know about the process. Learn what it means to cash in on a life insurance policy, your options for doing so, along with the pros and cons of this option.
what is collecting a life insurance policy?
Collection of a life insurance policy refers to the process by which policyholders can access the accumulated cash value of their policies prior to their death. Typically, life insurance works when policyholders pay premiums in exchange for coverage that provides a death benefit upon death, and some policies also have life benefits to help fund retirement. however, policies that build cash value, such as universal, variable, and whole life insurance, may allow the policyholder to access some of that money while they are still alive through loans, withdrawals, surrender, or sale of the policy.
charge vs. collect life insurance
When looking to collect on life insurance, you may also hear about cashing out; in some cases, these terms are used interchangeably. This is because there is no difference between cashing in and cashing out on a life insurance policy. the terms refer to the same process that allows policyholders to access the cash value of their life insurance policies while they are still alive.
Can a life insurance policy be collected?
You can collect on a life insurance policy, even while you’re alive, as long as you have a permanent policy that accumulates cash value or a convertible term policy that can be converted to a policy that accumulates cash value.
There are several options for cashing in on a life insurance policy, including:
- withdraw money from a cash value account (such as a savings account)
- take a loan against the cash value of the policy
- deliver the policy to the insurance company
- sell it through a life agreement
The best option for you will largely depend on whether you want to keep coverage and how much money you want to access. For example, if you only need a small amount of cash for a recent expense, like a minor medical expense or a new car, withdrawing money from the account or taking out a loan against the cash value will be the easiest options that will allow you to keep the money. coverage. however, if you are looking for a larger sum or want to terminate coverage, surrendering or selling the policy will be better options. If you’re not sure which option to choose, talk to a financial advisor for more information.
can a term life insurance policy be cashed in?
Term life insurance cannot be cashed in because these policies do not accumulate cash value during the limited time they provide coverage. however, some term policies have an option that allows the policyholder to convert them to a form of permanent life insurance. In some cases, these types of policies are called convertible term life insurance; in other cases, this option is available as an optional clause for an additional cost.
If you have a term life insurance policy and are wondering if it can be cashed in, you should review your policy documents or talk to your insurer to see if it can be converted.
ways to collect on a life insurance policy
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There are three ways to withdraw your life insurance policy while you are still alive:
- leverage cash value through loans, withdrawals or redemptions
- apply for living benefits
- living agreements
Not all options are available to everyone, as some have requirements related to age, health, and policy details.
If you have multiple ways to cash in on a life insurance policy, the best option depends on several factors, such as whether or not you want to keep the policy and how much money you want to access. To help you understand your options, here’s more information on ways to cash in on a life insurance policy while you’re still alive.
If you have permanent life insurance and want to take advantage of the policy’s cash value, you can do so in three ways:
Most life insurance companies allow policyholders to take a loan from the accumulated cash value of their policy. These loans do not have any payment schedule like other loans. however, these loans will accrue interest charges that will directly affect your death benefit, as any money not returned when the policyholder dies will be taken from the death benefit amount. this means you get less death benefits than you’re supposed to.
Alternatively, you can look into programs from other companies such as our Lifetime Loan Program which may allow you to get 95% of the cash surrender value of your policy.
Withdrawals allow you to withdraw money from the cash value of your policy without worrying about interest charges. This is probably the easiest and fastest way to cash in on a life insurance policy. however, you should remember that withdrawals may cause your policy premiums to change and may affect your life insurance benefits. By withdrawing money, you are reducing long-term growth potential and may leave a smaller death benefit for beneficiaries.
Relinquishing a policy is synonymous with canceling it. Once you cancel your policy, you release the entire cash value to the policyholder minus processing fees. however, before surrendering, you must ensure that you no longer need the coverage of the policy. In addition, some policies will charge a penalty if you collect too early, and you may also owe income taxes if your payment exceeds the premiums you paid over the life of the policy.
Getting cash on your life insurance by leveraging your cash value is the easiest way to cash in on your life insurance policy. however, it does not work for term life insurance policies as this type of life insurance does not have any cash value; a term policy would have to be converted to a permanent policy in order to collect.
get cash on your life insurance through living benefits
Living benefits are another way to get the cash out of your life insurance policy, while you’re still alive. life insurance with living benefits allows you to collect a portion of your insurance upfront, which in most cases is up to 50%. however, to access these benefits, there are certain criteria. You can only access these benefits if you meet the circumstances listed below:
1. chronic disease benefits
Chronic diseases, as you may know, stay with you for a long time. Most people with chronic illnesses need assistance with at least two of all required daily activities (known as ADLs), such as bathing, eating, dressing, or sitting and standing. If you have a chronic illness that has depleted you financially, you can withdraw money from your life insurance as part of your living benefits.
2. long-term care benefits
Today, medical care is a very expensive affair and people receiving long-term care must pay a considerable amount of money to receive the necessary services. Some life insurance policies offer optional long-term care riders that you can cash in to pay for assisted living costs.
3. terminal illness benefit
Those who are certified as terminally ill by doctors with a life expectancy of less than 12 months can apply for life benefits and are eligible to collect their life insurance.
While all of these benefits may be standard on most life insurance policies, be sure to purchase life insurance with living benefits. some policies may contain various terms and conditions that may restrict your access to them. You can also sell your policy through a viatical settlement.
withdraw life insurance through a life settlement
The final way a policyholder can cash in on their life insurance is by selling their policy through a life settlement. A life settlement is the process of selling your existing life insurance policy to an outside investor in exchange for cash.
If you don’t need the death benefits attached to your insurance, selling the policy is the best way to collect because you’ll get a lot more money than if you gave it up or let it lapse. In fact, with a life settlement you can get up to 60% of the death benefit amount in a lump sum of cash that can be used to fund retirement, go on vacation, or spend however you like.
Although the amount you receive through a life settlement is less than the actual death benefit, it provides more cash than other options listed above. On average, selling a life insurance policy can pay seniors 4 to 11 times what they would get from turning it over to the insurer. Because of this, life settlements are considered to give you the best return on investment. Plus, life settlements are a great option for people who no longer need a death benefit to support their families.
To be eligible for a life settlement, you must have a full term, variable, universal, or convertible policy and, in most cases, you must be at least 70 years old.
Should you collect your life insurance?
While the real purpose of life insurance is to provide death benefits to support your loved ones, that doesn’t mean you can’t get the benefits of your policy while you’re alive. The options listed above may allow you to collect on your life insurance policy if you urgently need cash. Cashing in your life insurance policy is a great way to access money when you need it, but which option you should use depends on how much money you need and whether you want to keep coverage.
If you only need a small sum, withdraw money or take a small loan from your policy. if you need a much larger amount, see if you’re eligible for life benefits or consider selling your policy through a life settlement.
contact us or call us today at (800) 694-0006 to get in touch with our team and discuss your options for collecting on your life insurance policy and find out how much you can get for your life insurance policy.