This is not only possible, but it can provide much-needed monetary relief for those struggling with financial difficulties. If you are struggling to pay medical bills or you have to pay for long-term care, selling a life insurance policy has a positive effect on your financial situation. Can I cash out my term life insurance policy?
How to sell a term life insurance policy for cash
The sale of a cash life insurance policy is possible if the policy can be exchanged for permanent life insurance.
After conversion, the life settlement service provider can then make an offer based on age, health status, type of insurance, premiums, and death benefit.
People aged 65 or older can usually sell their life policies as long as their nominal value exceeds $ 100,000.
Many life insurance companies allow you to add a converter to your policy when you buy it on your first purchase – sometimes for an additional fee. The reason for this is that timely life insurance is temporary and covers periods from 5 to 40 years. While this may be fine for some people, the conversion rider helps you plan your future.
Withdrawals
In principle, it is possible to withdraw a limited amount of cash from your life insurance policy. The amount available varies depending on the type of policy you have and the company that issues it. The main advantage of cash withdrawals is that they are not taxable to the policy base unless the policy is classified as a modified grant agreement (MEC). MEC is the term for a life insurance policy where financing exceeds federal tax law limits.
However, cash withdrawals may have unexpected or unrealized consequences:
- Payments that reduce your monetary value can reduce your death benefit – a potential source of funds that you or your family may need for income replacement, business goals, or wealth.
- Cash withdrawals are not always tax free. For example, if you make a payment in the first 15 years of the policy and the payment reduces the death benefit from the policy, some or all of the cash paid may be taxable.
- Payments are treated as taxable if they exceed the base in the policy.
- Withdrawals that reduce the redemption value of cash can increase contributions to maintain the same death benefit; otherwise, the rules may expire.
If your policy is classified as MEC, withdrawals are generally taxed according to the rules applicable to annuities – cash withdrawals are considered to have been made on interest first and are subject to income tax and possibly a 10% penalty for early withdrawal if ‘again under 59.5 years of age at the time of withdrawal.
Bottom line
Don’t let the value of cash accumulate in your life insurance policy without deciding how to use it. And make sure that the cash value is exhausted and transferred later in life, so that it does not get to the insurer after death.
