Access Cash Value of Senior Life Insurance
In retirement you may want access to some or all of the cash in your senior life insurance policy. What are some of the ways to get at it?
All cash-value life insurance policies include a “surrender right,” which entitles you to give the policy back to the insurer for its current cash value if you suddenly need cash. If you surrender the policy, your current insurer cancels the insurance and sends you a check for its cash value.
You can find out the status of your policy. Just ask your agent or the insurer for an in-force policy and to show your status. He should give you a table illustrating your guaranteed cash value, estimated cash value; cash surrender value, and death benefit for the remaining years of the policy. Insurance companies send statements with this information to you each year on the anniversary of the policy.
When you retire, you can turn the built-up cash value of your life insurance into cash. A couple of ways are:
• You can withdraw your basis in the policy free of tax. The basis is the amount of premiums you paid less any withdrawals you have made.
• You can take a policy loan. Loans are not generally taxable because they are an advance of the death benefit.
(Remember that taking cash from your policy will reduce or eliminate your death benefit.)
You could also sell your policy for cashto a third party but we discuss this in a separate post.
You may want to terminate it all together. Most cash-value policies offer three non-forfeiture options if you want to terminate your policy before maturity:
1. You can receive the policy’s cash surrender value in a lump sum, or
2. You can use the lapsed policy to continue to provide death protection at the net rate for term insurance, or
3. You can buy a paid-up term or cash-value policy for a reduced face amount using part of the cash surrender value of the policy and keep the rest for your use.
If you have life insurance held within an irrevocable life insurance trust, you generally can’t touch it. However, a family split-dollar arrangement can make the cash accessible by structuring the ownership of the life insurance policy so that the trust owns the insurance coverage and the trust-maker’s spouse holds the investment component.
Note that the purchase of life insurance will incur fees, commissions, and potentially surrender charges. Withdrawals prior to age 59½ are subject to 10% penalty. Guarantees are subject to the claims-paying ability of the insurance company. Income received from a life policy classified as a modified endowment contract is taxed as ordinary income. Not everyone can purchase life insurance due to health reasons. The purchase of life insurance simply to access the cash value may not be suitable unless insurance coverage is necessary.
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Tags: cash surrender value, sell policy, senior life insurance
January 25th, 2009 at 9:21 am
Personally, I’d avoid a whole life policy and it’s associated investment component in favor of a “plain old term life” policy. Good article though.
February 15th, 2009 at 10:03 pm
Thanks for the information. I would also suggest to stick to the term life insurance policy instead of the whole life policy, there are many things that the term can give you over the whole like one that will take too long to explain here but it has been proven to be much better.
Thanks for your article though
TM
June 5th, 2009 at 2:23 pm
Term life insurance is probably the best way to go, especially in these tough economic times. I would make sure you weigh all of your options first, before making any decisions. Not everyone’s situations are the same.
Thanks for the information. You do a great job explaining things!!
June 23rd, 2009 at 6:46 am
Interesting post. I think taking the cash basis sounds like the best way. Not sure if every insurance company allows it and if it cancels policy. I never thought about half the ways you listee to take cash from insurance policy so i need to read more about it.