When Should I Keep or Cash in my Whole Life Insurance Policy

You have a whole life insurance policy with accumulated cash value. What are the best options for keeping the cash value or cashing out a whole life policy?

Are you able to cash in your policy?

Cash value is a feature a whole life insurance policy may carry. If your policy has this feature, the cash value grows as the premiums are paid on a timely basis. If the cash value accumulates enough money, the policyholder may be allowed to withdraw money in the form of a loan, or with some policies, the entire life insurance policy can be cashed out or surrendered.

Term life insurance is life insurance that covers a person for a set period of time. Most term life insurance coverage can be for 10, 15, and 20 years. Most term life insurance policies do not accumulate cash value.

Whole life insurance or permanent life insurance does not expire. As long as the policyholder continues to pay the premiums on time, the policy remains active. When either all the premiums have been paid, or enough cash value is accumulated, the whole life or permanent life insurance can be utilized in different ways:¹

• The life insurance policy remains in force and the entire amount or face value is disbursed to the beneficiary or beneficiaries after the death of the insured.
• The policy may be cashed in or surrendered. This is where a whole life insurance policy is surrendered for its cash value minus any debts against the policy, and any surrender charges.
• Part of the money can be withdrawn from the life insurance policy. The death benefit itself doesn't change, but amounts owed to the policy at the time of death, in the form of loans, will be deducted from the death benefit amount ultimately paid, if the loans are not repaid during the life of the policyholder.

Why withdraw cash from your whole life insurance policy?

The reasons a person may want to withdraw cash from their whole life policy:

1. The policyholder may have a financial or medical obligation and needs the money now.
2. The policyholder has been diagnosed with a terminal or chronic illness and wishes to use the money.
3. The whole life insurance policy may have been purchased to insure the life of a business partnership and may no longer be needed.

How does a cash value surrender work?

If a policyholder decides to surrender their life insurance policy, consider these factors:

1. A policyholder can only cash out the amount of money accumulated as a cash value. Once the insurance is surrendered, the life insurance coverage is no longer active, and the policy may not be able to be reinstated.²
2. The cash value is the amount of cash that grows over time as the premiums are paid on time. The cash value and the cash surrender may be the same amount, which depends on how long the policy has been in force.
3. There are surrender fees. The policyholder should check with the insurance company what the fees will be for surrendering the insurance contract. The fees vary between insurance companies, and usually are calculated as a percentage of the cash value of the life insurance policy.³

It’s a frequent practice for business partners who own a small to medium-sized business to buy a whole life insurance policy covering each partner, in case one or more of the partners dies and leaves the company financially vulnerable. If the company is sold, there may no longer be a need for a whole life policy, and the partners may decide to surrender a policy and retain the cash value.

Withdrawing cash in the form of a loan

A policyholder may need short-term cash to cover unexpected medical bills or other financial concerns. Under certain circumstance, you withdraw cash from your whole life insurance policy in the form of a loan.

1. The insurance company will charge interest on the amount loaned. If you do not repay the loan, the loan amount and accrued interest will be deducted from the death benefit paid upon the death of the insured person.⁴
2. Withdrawing cash in the form of a loan from your life insurance policy has some advantages: You need no approval, and the interest rate may be more competitive than a personal loan.

How Do You Withdraw Cash from a Whole Life Policy?

Policyholder buys a whole life insurance policy with a cash value

Policyholder pays all the premiums

Insurance provider

cash value accumulates: can withdraw money

Cash value account

Policyholder can surrender policy

OR

Policyholder can withdraw in the form of a loan

What is an accelerated death benefit, sometimes referred to as a living benefit?

If you have living benefits as a feature or rider in a life insurance policy, you may be able to withdraw part or the entire amount of the death benefit of the whole life insurance policy before the death of the insured. The reasons for using an accelerated death benefit include chronic, long-term care, or terminal illness. Some term life insurance policies include an accelerated death benefit.⁴

Other considerations regarding accelerated death benefits:

1. The policy may have to be in force (active with timely paid premiums) for a certain period of time before using the accelerated death benefit.
2. There may be interest charged on the amount disbursed as the accelerated death benefit.
3. There is less value for your beneficiaries. This advanced amount is deducted from the total amount of the policy whereby your beneficiaries will receive a remaining amount of a death benefit minus any administrative fees.

Applying cash value to policy premiums

In times of financial struggles or challenges, you may have enough cash value to cover the life insurance premiums.

Before withdrawing cash from a life insurance policy or surrendering your whole life insurance policy, you may want to talk to your financial advisor.⁵

A licensed life insurance agent may also advise you.

Sources:

1. The Ascent, Motley Fool Service, https://www.fool.com/the-ascent/insurance/life/cash-out-life-insurance/, published February 21, 2023.
2. The Ascent, Motley Fool Service https://www.fool.com/the-ascent/insurance/life/cash-surrender-value/, published September 12, 2023.
3. Life Happens life insurance 101, https://lifehappens.org/life-insurance-101/what-are-living-benefits-of-life-insurance/, Accessed 2024.
4. The Ascent, Motley Fool Service, https://www.fool.com/the-ascent/insurance/life/cash-out-life-insurance/, published February 21, 2023.
5. Forbes Advisor, https://www.forbes.com/advisor/life-insurance/cash-value-life-insurance/, published October 16, 2023.

Categories: Life Insurance, Term Life Insurance, Whole Life Insurance

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