When should you cash out a whole life insurance policy? That depends what you mean by “cash out” – there are several ways to pull cash from your whole life policy. One of these options leaves you with zero coverage going forward, which may not be ideal for your loved ones. We’ll go over all the options below, and explain the benefits and consequences for each of them.
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When Should You Cash Out a Whole Life Insurance Policy?
Cash Out Method #1: Policy Loan
Cash Out Method #2: Withdrawal
Cash Out Method #3: Surrender Your Policy
When Should You Cash Out a Whole Life Insurance Policy?
If you want to tap into your policy’s cash value, there’s no right or wrong time to do that. A lot of our clients cash out a portion of their cash value for expenses like these:
- Home renovations
- Extra retirement income
- A child’s college tuition
- A down payment
- Bucket-list travel
- Business expenses
- Emergencies
There are no restrictions on how you use your cash value - it’s your money! But there are a few considerations to keep in mind.
How much cash value do you have? How much do you want to pull out? Ideally, you want to leave enough cash value in the policy so that it continues to grow, tax-deferred, over time. You also need to leave enough to cover the basic cost of your coverage. This means the best time to cash out is when you’ve already accumulated enough cash value to cover a loan or withdrawal, with enough left behind to keep your policy active and in no danger of lapsing. In the first few years of your policy, you won’t have built up enough cash value to do this. We recommend letting your policy grow with continued payments and compound interest for at least a few years (ideally, a decade or more) before you consider cashing out.
➡️ Rather talk to a real live person about your whole life insurance policy? That’s why we’re here! Call us at 800-823-4852 or click the button below to get a quote for a new policy.
Get a Free QuoteCash Out Method #1: Policy Loan
One way of pulling cash from your whole life insurance policy is through a policy loan. This is exactly what it sounds like: you take out a loan from your insurer, borrowing against a percentage of the cash value of your policy. The key point here is that you aren’t actually removing any of your actual cash value – you’re borrowing against it, using it as collateral. That cash value remains in place, which means it continues to earn interest. Your insurer might, however, credit the portion you borrowed against with a lower interest rate.
Speaking of interest, as with any loan, the insurance company will charge an interest rate. This varies by insurer and by policy – it’s almost always lower than what you’d get from a bank loan or line of credit. Oftentimes, the insurer will charge a low rate that’s about the same as the interest rate credited to your cash value.
Although it’s called a “loan,” you don’t actually have to pay the money back. When you pass away and your beneficiary(ies) file a claim, the insurance company will deduct any outstanding loan balance from the death benefit before the pay that claim.
Because there is no repayment schedule, you won’t get a bill or a reminder to pay. It’s up to you to monitor and pay back the loan as you see fit. Keep in mind that if you don’t make any payments, the interest owed will compound yearly. You have to keep an eye on this if you don’t want to deplete the death benefit amount you originally purchased for your loved ones. You also have to ensure that you leave enough cash value in the account – money you don’t borrow against – so that your account contains the minimum amount your policy requires to cover the cost of your coverage.
The good news? There are no credit checks involved in a policy loan, and it doesn’t appear on your credit report. It’s simply a transaction between you and the insurer that is never reported to a credit bureau.
If you’re thinking about taking a policy loan, be sure you ask your insurer about the interest charges. Is the rate fixed or variable? Is it charged monthly, quarterly, or yearly? Ask for an illustration that shows you what happens if you repay the loan, don’t repay the loan, or only pay the interest. Then you can make an educated decision that balances the benefits of a loan with your loved ones’ need for the death benefit in the future.
➡️ Rather talk to a real live person about your whole life insurance policy? That’s why we’re here! Call us at 800-823-4852 or click the button below to get a quote for a new policy.
Get a Free QuoteCash Out Method #2: Withdrawal
Another way of pulling cash out of your whole life policy is through a withdrawal. Unlike a loan, a withdrawal doesn’t involve repayment. You may see this referred to as a “partial surrender,” as opposed to a full surrender, which we’ll talk about below.
With a withdrawal or partial surrender, you can withdraw as much as you’ve paid into the policy. For example, if you pay $5,000 each year and have owned your policy for 10 years, that’s $50,000 technically available to withdraw. There is zero income tax liability for withdrawing up to the amount you’ve paid in premiums over the years.
However, keep in mind there’s a minimum amount you need to leave in your policy to cover the ongoing cost of your coverage. If you withdraw too much money, you run the risk of either letting it lapse (by not having enough funds left to cover its cost) or reducing the policy’s death benefit. Since you bought it to protect your loved ones, you don’t want to leave them without enough to get by if anything happened to you!
The bottom line? If you’re interested in withdrawing money from your whole life policy, contact your insurer and ask them for an illustration based on the amount you’re thinking of withdrawing. The illustration will show you what happens to the policy based on your anticipated withdrawal – how much is left and how it’s expected to grow with the reduced amount available for cash value growth.
➡️ Rather talk to a real live person about your whole life insurance policy? That’s why we’re here! Call us at 800-823-4852 or click the button below to get a quote for a new policy.
Get a Free QuoteCash Out Method #3: Surrender Your Policy
If you no longer need your whole life policy at all, you can surrender it and take a payout of the cash value. “Surrender” is insurance-speak for giving up your policy. It means you won’t have coverage any more, and there will no longer be a death benefit for your loved ones. That’s why we highly recommend you look at other options first. Is your policy too expensive? Let’s look at cheaper policies that better fit your budget and still provide a death benefit for your family!
If you do choose to surrender your policy, don’t just stop making the payments. You have to contact your insurer and tell them you want to surrender it. They’ll do a final calculation on what you’ll receive, subtracting any outstanding policy loans and a surrender fee from the cash value you’re owed.
If the cash value payout you receive is less than what you’ve paid into the policy over time, you won’t owe any income tax on what you get. If the payout is more than what you’ve paid, you will have to pay tax on the portion that’s over and above the sum total of your payments.
Before you make a full surrender of your policy, consider what that will do to your loved ones. You bought the policy for their financial protection. Are they in a place where they wouldn’t need that money anymore? If not, let us help. We can search for a new policy that still provides financial protection, but perhaps with a smaller death benefit that costs less every month.
➡️ Rather talk to a real live person about your whole life insurance policy? That’s why we’re here! Call us at 800-823-4852 or click the button below to get a quote for a new policy.
Get a Free QuotePresented for informational purposes only. Always consult with your tax and financial professionals for complete and current information on possible tax liabilities based on your unique financial situation.