When can you start cashing out a life insurance policy? Are there any requirements?
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Asked March 10, 2014
Depending on the circumstances and amount of cash you are trying to raise, you may be able to trade the cash value of many permanent life insurance policies without affecting the policy itself. However, some situations such as the need to pay for long term medical care, must necessitate actually relinquishing the policy for a cash settlement, and there a couple of ways to accomplish that.
If you are only cashing in the policy because you cannot afford it any longer, consult the insurance company to find out whether the policy can be restructured. This would reduce the cost of the policy premiums, but would not have any cash return. Additionally, many types of policies cannot be readily converted, or require fees or penalties during the process.
The cash value in a life insurance policy builds up over time. If the policy is young, the cash value will be low, but the amount builds with your premium payments and earns interest on that amount, so the value will grow. To get out of a temporary financial squeeze, the cash value of your policy may be enough, but more demanding situations may require more than the cash value is able to provide.
Some policies have a cash settlement value. If yours does, you can cash in the policy with your insurance company, minus fees and penalties for a percentage of the face value of the policy. This method does not offer a high return on your investment, but it is perhaps the fastest way to get the policy closed to your benefit.
If you have an ongoing or terminal illness, you can sell the policy to an investor. This will gain you immediate cash flow at the cost of having your life insurance policy owned by someone with no direct ties to you. When you pass away, the policy will pay out for the face value to the investor who owns it rather than to your chosen beneficiaries. Essentially, you are putting your life insurance policy up as a permanent trade in exchange for funds. The problem with this method is that your payout will most likely be less than 20% of the face value of the policy.
Answered March 10, 2014 by Anonymous