Advantages of Cashing out Participating Life Insurance

Life insurance is a great asset to have to protect your loved ones in the case of death. Life insurance pays out death benefits, which is an agreed upon amount of cash that will help your loved ones cover the cost of your funeral, outstanding debts, as well as providing funds to make up for a loss of financially stability that your death may cause. Everyone should have life insurance. However, not all life insurance policies are created equally. Did you know some policies carry a cash value that can be withdrawn?

Universal Life Policies

Certain life insurance policies, such as universal life, carry with them a cash value, sort of like a savings account. A portion of your monthly premium is directed to this cash value, and it grows over time. There are many advantages to having this type of policy. Here are a few:

• In most cases you can withdraw funds at any time. Usually there will be a form to fill, and you select the amount of money you’d like to withdraw – it must be within the limits of your existing cash value – and that’s it!

• Once withdrawn, the cash is not earmarked the way a car or mortgage loan would be. You are free to spend it however you’d like. Many people use it to cover medical expenses or assist a family member, but the possibilities are endless.

To be fair and informative, it is important to recognize that there are possible drawbacks to pulling out your cash value as well. Although each policy varies by provider, some potential risks are:

• Pulling out the cash value and not paying the premium may mean that your policy is void and therefore has to be canceled. When you miss a premium payment, it can be taken from the cash value, so if you use up the value, ensure your payments remain on track.

• You have to start from scratch to build the value back up.

• The cash value is deducted from the death benefits in some policies.

• Cash in hand could be taxed, so it is important to do that math to determine if withdrawing the cash value is worth it.

An Important Distinction

One key element of a universal life insurance to remember is that it is vastly different from term life policies. Universal policies protect you for your entire life, assuming you always pay your premiums. Term life is a policy you carry for a set amount of years (say 20) but after that 20 years you are no longer covered. Really good term life policies require medical exams to determine how big of a risk you are for the insurer, and this then determines your premium (if you qualify). The older you get the more challenging it can be to either secure a term policy or maintain reasonable premiums.

With a universal life policy your coverage never runs out, and you don’t have to participate in medical exams or questionnaires to renew your policy. If you don’t pay your premiums, however, you will lose your coverage.

The key for this type of policy is to buy it when you are young. The younger you are when you buy, the more of your premium that gets diverted to the cash value – and the lower your premiums.

If you have any questions about the advantages of universal life insurance, or whether you are a good candidate for it, LSM Insurance can help. Whether universal life insurance is the answer, or if another product is better suited to your needs, we will find the insurance that fits you best.

Hi! I'm Stevie, and I'm interested in everything that surrounds the topic of personal finance. I hope my articles will be of some use to my readers!