Should I Cash Out My Insurance?
We all know that insurance is a necessity. You need that coverage to protect you from the mishaps and inevitabilities we encounter in life. However, some insurance policies also build up cash value which could be useful for other things in life as well, such as the down payment for a new home or the cost of a retirement cruise. If you’ve thought about cashing out your insurance policy, the one thing you have to keep in mind is when to cash out your policy in order to receive the maximum financial benefit.
What Determines the Cash Value?
Cash value is determined by four main factors. The first factor is your policy’s face value. For example, if you purchased a $50,000 whole life policy, the face value is $50,000. Another factor is how long you’ve had the policy and how long you’ve been paying premiums. This may seem like the same factor and usually the answer s the same for both. In some cases, a policy can accumulate so much cash value that this accumulated value can be used to cover the cost of the premiums. This means you wouldn’t have to make the payment but it also means the available cash value is going to be decreasing in the process.
The fourth factor is whether or not you have any loans outstanding on the policy. Once the policy starts building cash value, you can take out a loan on the money. Of course, the money has to be paid back with interest. If you cash out the policy before the loan is paid back, the remaining debt will be subtracted from the current value of the policy.
Your Options
If you need money for something and have cash value in your insurance policy, there are a few ways you can use this accumulated value for your benefit. For starters, you have both of the options discussed above.
For some people, not having to make those premium payments can free up enough available cash to make a purchase, pay down their debt, or even pay off their home or car early. If you’ve retired and don’t have as much income, eliminating one of your bills without eliminating the coverage itself could be a valuable solution.
Another option is to take out a loan on part of that value. You still keep the policy, but you also receive some money for whatever needs you have. In some cases, you may not even have to make payments towards the loan. You can just have the money taken out of the insurance policy when the claim is made.
A third option is to surrender the policy. When you take this option, you’ll receive a lump sum payment. This will be less than the policy’s face value but the exact amount will be determined by those factors mentioned above. While this option gives you more money, you will also lose the policy. Depending on your present health and age, you may want to hold onto the policy since getting new one might be more challenging.
June 18, 2009, Posted by Rainy Day Mitch