With rising inflation and other issues causing economic concerns, many seniors may be looking to life insurance policies as a financial solution. While life insurance can serve as a source of needed income there are some drawbacks. You can access cash through withdrawals, policy loans, and/or full or partial surrender of the policy.
Withdrawals
Withdrawing from life insurance means you take cash out of the policy. One advantage is that withdrawals are not usually taxable up to the policy basis amount, but it may decrease your cash value and reduce your death benefits. Withdrawals that reduce your cash surrender value could cause your premiums to increase.
Policy Loans
Most cash-value policies allow you to borrow money using your cash accumulation account as collateral. The interest rates will vary and loan balances generally reduce your policy’s death benefit. An unpaid loan that is accruing interest reduces your cash value. If the loan is still outstanding when the policy lapses, the borrowed amount becomes taxable to the extent the cash value exceeds your basis.
Surrendering the Policy
If you surrender, or cancel, the policy, you can receive the accumulated cash value and use the cash however you would like. You will likely be charged a surrender fee. The biggest drawback here is that you are completely relinquishing your right to the death benefit. If you later choose to reapply for life insurance, you may not get the same coverage or benefits.
Life Settlement
Another option is to sell your life insurance policy to someone else or a life settlement company in exchange for cash. The new owner will pay the premiums and then receive the death benefit when you die. Again, the drawback here is relinquishing your right to the death benefit and any gain in excess of your basis in the policy will be taxed as ordinary income. You may also have to pay commissions and fees during the sales process.
During difficult economic times, many seniors contemplate ways to liquidate assets for cash. Before choosing to withdraw, sell or surrender your life insurance policy, take time to think through why you purchased it in the first place. Evaluate whether you still need the coverage to protect your beneficiaries. There may be other assets to liquidate that would be more advantageous to your overall planning goals.
For more information on comprehensive estate planning and retirement planning, contact the estate planning attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
