Surrendering cash value life insurance 

If you own life insurance with cash value, like a whole life or universal life policy, there are ways you can access and receive some or all of that cash value in times of need.

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Can you cash in a life insurance policy?

Life insurance is primarily designed to protect your family financially after you are gone; however, many permanent life insurance policies also accumulate cash value that you can access during your life in times of need, to help cover the cost of a medical emergency, for example, or to help pay a child’s college tuition.

In difficult financial times, it’s vital that you do what is right for you and your family, and that may include borrowing from or cashing in your life insurance policy.

If your life insurance policy has a cash value, there are several ways you can access it while you are still alive, if it becomes necessary.


Term life does not have cash value

Term life policies do not include cash value, because they are meant to cover a particular time period only and then end. This means that you won’t be able to cash in a term life policy. It may be possible, however, to convert your term policy into a whole life policy that will allow you to build cash value. Talk to your financial professional or a New York Life agent


Can I access the full amount of my policy?

No. A policy that has a $50,000 life insurance benefit cannot be cashed in for $50,000. That amount can only be collected by your beneficiaries when you pass, provided you didn’t access any cash value. The money you will be able to cash in will depend on how much cash value the policy has built, which is almost always considerably less than the death benefit and can vary dramatically depending on how you’ve structured your policy.


Are there penalties on a life insurance payout?

Generally, yes. Depending on how you choose to get your life insurance payout, you will likely be subject to some fees and may owe taxes. Each policy will be different, and it’s important to understand all the details before you take this step. Please note that cash value takes time to build, so there may be little to no cash value accumulated during the early years. In addition, if you pull out too much or can no longer make premium payments, you may lose your coverage completely.


Alternatives to cashing in your life insurance

It could be wise to investigate other options for procuring immediate cash, like home equity loans, personal loans, borrowing against a 401(k), or even a 0% APR credit card—depending on your present and future financial needs.


Cash value of life insurance explained

Cash value life insurance is permanent life insurance that grows cash value over time. You can withdraw or borrow against the accumulated cash value to supplement retirement savings, pay down a mortgage, and cover unforeseen emergency costs or unexpected expenses. The amount of cash value your life insurance may hold depends on the premiums you pay, the length of time you’ve held the policy, and any specific details or add-ons you may have chosen when you purchased your policy.


Part of the premium converts into cash value

Cash value builds over time as you pay your premiums, and a portion of the premiums goes into a fund. This is generally a small percentage, but it differs based on the type of insurance policy and its features. (It’s important to note that not all policies accumulate this way).


Your cash value grows over time

As you continue to make premium payments, the cash value of your policy increases. There are also add-ons called “riders,” that allow you to contribute more to your policy, so you build cash value faster. Speak to an agent to learn more about rider features and how you can use them to customize your policy.


Reducing the cash value reduces your life insurance benefit

If you borrow or make withdrawals from your cash value, the death benefit of your life insurance will also go down. That means your beneficiaries, likely your family, will receive a reduced payment when you pass. You’re basically converting money for them later into money you can use now. Consider this trade-off carefully when deciding whether to access the cash value of your life insurance.


Calculate the cash value of life insurance

The cash value of your whole life insurance policy calculation depends on your premium payments, the type of policy you have, and any loan balances. You can typically find the cash value amount on your life insurance statement, together with your surrender cash value. There should be a section that highlights the guaranteed cash value your policy has accumulated over time. If you’re not sure about the number or can’t locate it on your statement, reach out to your insurer or contact your agent.


How do I cash in a life insurance policy?

There are a few ways to get cash value out of your policy. The option that best suits your situation will depend on how much you need and how important it is to keep your policy coverage.


Use the cash value to pay your premiums

If you are struggling to keep up with premiums but want to keep your life insurance policy in place, there are ways you can apply the cash value to help pay premiums. Keep in mind that this works differently with each type of policy. In some cases, you can use the dividends you potentially receive to help pay your premiums, and in other cases, such as with universal life, the cost of your premiums comes directly out of the cash value.


Make a partial withdrawal

Depending on your life insurance policy and how it’s customized, you may be able to withdraw money directly from the cash value. Each policy is different, so you may or may not be subject to early withdrawal fees that affect your overall benefits.


Borrow against the policy

You can often take out a loan with the cash value of your life insurance policy as collateral. With any loan, however, you’ll be charged interest—usually at a more favorable rate than you would get on the open market. If the loan isn’t paid back before you pass, it’s usually deducted from the death benefit, which means your beneficiaries will receive less than you intended. It should be noted that if you surrender your policy while you have an outstanding policy loan, you may be liable for federal or state income taxes if the value of the outstanding loan plus your cash surrender value is more than the total amount of premiums you have paid into your policy (less certain non-taxable distributions).


Surrender the policy

This means functionally canceling your policy. If you do this, your life insurance coverage will end. You’ll generally receive most or all of the cash value that has accumulated in your life insurance policy, but it may be subject to surrender fees and federal income taxes. Any unpaid premiums will also be collected.


Sell it to a third party

This is functionally the same as surrendering your policy. You will no longer have coverage. The difference between the amount you receive for selling your life insurance to a third party and the amount you receive for simply surrendering the policy will vary depending on many factors. If you sell the policy, you may also be subject to large commissions and fees that reduce the amount you receive.

If you are considering cashing in your life insurance policy, the best thing you can do is to talk to a trusted financial professional, who can help you go over all your options and find the path forward that’s best for you and your family.


Want to learn more about life insurance? 

A New York Life financial professional can help determine what’s right for you.

Certain tax advantages are no longer applicable to a life insurance policy if too much   money is put into the policy during its first seven years, or during the seven-year period after a “material change” to the policy. If the cumulative premiums paid during the applicable 7-year period at any time exceed the limits imposed under the Internal Revenue Code the policy becomes a “Modified Endowment Contract” or MEC. A MEC is still a life insurance policy, and death benefits continue to be tax free, but any time you take a withdrawal from a MEC (including a policy loan), the withdrawal is treated as taxable income to the extent there is gain in the policy. In addition, if you are under 59 ½, a penalty tax of 10% could be assessed on those amounts and upon surrender of the policy.

Neither New York Life Insurance Company (NY, NY), nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.