Universal life insurance can be a great financial tool to provide for your loved ones while building up cash value. But eventually, you may need to cash out your policy. For instance, you might need extra cash to buy a new home, take care of an emergency, or even retire early.
Fortunately, you can cash out your universal life insurance policy in several ways. Let’s dive deeper into how you can cash out universal life insurance and each method’s pros and cons.
How does cashing out a universal life policy work?
Many permanent life insurance policies, including universal policies, come with a savings component called cash value. Part of each premium payment goes into this cash value. Universal life insurance policies’ cash value options allow you to grow your money . Once you’ve built up enough cash value, you may be able to tap into these funds when you need to cover expenses.
Ways to cash out your universal life insurance policy
Here are four common ways to cash out your universal life insurance policy:
1. Withdraw from the cash value
Once you have a large enough cash value, you can withdraw funds for personal use. In many cases, only funds exceeding your basis (the amount of premiums you paid) are considered taxable income. But keep in mind that withdrawals can reduce your death benefit if you make a withdrawal too early in the policy’s life.
2. Borrow against the cash value
If you don’t want to make a withdrawal, many universal life insurance policies let you borrow against your policy’s cash value instead. For many universal life policies, borrowing is not taxable. There are no credit checks, no restrictions on your use of the loan, and interest rates tend to be pretty low. You don’t have to make payments, either.
That said, any outstanding loans generally reduce your death benefit until you pay them back. Additionally, interest accrues and adds to your total loan balance. If the loan balance grows larger than your remaining cash value, your policy may lapse.
3. Surrender the policy
Besides withdrawing or borrowing from your policy, you can surrender it entirely. This involves giving up your policy in exchange for the cash value you’ve built up. This can be an excellent choice if you no longer need life insurance coverage.
But keep in mind that once you surrender, you’ll no longer have the death benefit. And if you surrender the policy too early, you may owe surrender charges that vary in size depending on how long you’ve had the policy.
4. Make a life settlement
A life settlement involves selling your policy to another individual or a life settlement company. In exchange, you’ll receive cash. The policy remains in force as long as the new owner keeps up on their premiums, and they’ll receive the death benefit when you die. In many cases, you must meet the following requirements to qualify for a life settlement:
• You are at least 65 years old
• You have a life expectancy of 10 to 15 years or less
• The policy has a death benefit of at least $100,000 (in most cases)
Should I cash out my universal life insurance policy?
Cashing out your universal life insurance policy can be beneficial in certain situations. Once you’ve built significant cash value, you can withdraw or borrow against the policy to make big purchases or achieve other financial goals without losing all coverage.
For policyholders that no longer need coverage, like those that are retired or have kids that are now independent adults, surrendering the policy or getting a life settlement may make sense. With either of these options, you may be able to put your cash value to better use elsewhere.
But if you don’t have much cash value yet or need all your coverage, you may want to avoid cashing out your policy. Otherwise, you could risk getting surrender charges or having the policy lapse, depending on your cash-out method. Examine your situation closely and talk to a licensed agent or financial advisor before deciding whether to cash out and which method to choose if you go this route.
