how to cash out life insurance policy?

When looking for cash from a life insurance policy, first determine whether the policy is a whole life or term life policy. When purchasing a life insurance policy, many find the process complicated and reach for the less expensive term life policy. This policy is only good for a specified period and does not have a cash-out option. The whole life policy, however, builds-up a cash value that can be "surrendered" in exchange for cash payments.

After a specified amount of time, approximately 15 years depending on the insurance company, the cash value can be accessed. Partial withdrawal, policy loans, cashing in the policy or trading the policy for an annuity are all ‘cash-out’ options. Contacting the insurance agent is easy; the tax ramifications and long-time effects of the options are more complicated.

The available partial surrender value is the amount accessible for cash from the policy. This financial value is posted on the policy statements. The older the policy is the higher the value. It grows with each monthly premium payment made. Based on the value, partial withdrawal or complete surrender can be made.

A loan is also an option. This money is borrowed from the insurance company, however, it is not a withdrawal, but rather the policy is used as collateral. Use caution with policy loans; the “surrender squeeze” is a familiar trap for taxes owed on lapsed policies or loans that exceed premiums. Once the death benefit is not needed, trading the policy for an annuity known as a 1035 exchange converts the policy without taxes; this can be designed with monthly payments for a specified amount of time.

Regardless, of the vehicle chosen to cash-out the policy, be sure to review the potential tax ramifications and beneficiary losses before making a final decision. Contacting the agent is just the beginning.