Working Funds: 3 Ways to Cash in on Life Insurance for Retirement (2024)

FAQs

What are the three ways you can access the cash value from a life insurance policy? ›

You have several options if you want a cash value life insurance policy. Each policy type accrues cash value differently, but in all cases, you can get to your cash value through a policy loan, withdrawal or surrender of the policy.

Using life insurance for retirement income

As the Simple Dollar explains, the cash-value account grows over time and can be withdrawn as a source of income in retirement. And provided the amount withdrawn doesn't exceed the amount you've paid in premiums, it's not subject to taxes either.

You can borrow against your cash account typically with a low-interest life insurance loan, withdraw the cash (either as a lump sum or in regular payments), or you can surrender your policy.

How much can you sell a $100,000 life insurance policy for? On average, you can expect to receive 20% of the policy's face value when you sell it, according to the Life Insurance Settlement Association (LISA). That means a $100,000 life insurance policy might sell for $20,000. However, this is only an average.

Ultimately, deciding whether to draw cash from a life insurance policy comes down to personal need. "In some instances it may make sense to borrow funds for short-term needs, such as a year of tuition, to tide over a business or for an item such as a wedding, if the client can repay the loan," Teitelbaum says.

Overfunded life insurance is when you pay more premiums into a policy than are required. Permanent life insurance policies, such as whole life insurance or universal life insurance, have a cash value component. So, by overfunding your policy, you contribute more to the cash value.

Permanent life insurance can build cash value, a reserve of money you can access while alive. This is money that you could use to supplement your retirement income, pay for medical care, or use as an emergency fund. Cash value grows tax-deferred. You don't owe income tax as long as the money stays in your policy.

Cashing out your policy

You're able to withdraw up to the amount of the total premiums you've paid into the policy without paying taxes. But if you withdraw on any gains, such as dividends, you can expect them to be taxed as ordinary income.

Do you pay taxes on life insurance cash out? ›

In most cases, cash value life insurance isn't taxable. Your beneficiaries can receive the death benefit as a lump sum tax-free, though they won't receive your cash value balance. As a policyholder, you'll typically only pay taxes on the cash value if you take out more money than you put in through premiums.

If you have a chronic or terminal illness, you should consider finding out how much you could get for selling your life insurance policy. The cash payout you receive can help cover unexpected out-of-pocket medical (and other) expenses, including long-term care.

Illegal activities

Generally, life insurance policies exclude coverage for deaths arising from participation in illegal activities or criminal behavior. Additionally, in some instances, the insurance provider could deny coverage for a death resulting from an illegal drug overdose or drunk driving.

You can only borrow against a whole life insurance policy or a universal life insurance policy. Policy loans reduce the death benefit if not paid off. Life insurance companies add interest to the loan balance, which if unpaid can cause the policy to lapse. Only permanent life insurance builds cash value.

Permanent life insurance policies will allow you to access the cash portion of your account while you're alive. Term life insurance, meanwhile, does not have a cash element for policyholders to access.

Whole life, universal life and variable life insurance policies offer a cash value component. While they're all types of permanent life insurance, they differ greatly in how premiums work and how cash value grows. For instance, a whole life policy offers fixed premiums and cash-value interest rates.

The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. When your policy has enough cash value (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company.

" The cash value in a whole life policy is a nonforfeiture value, meaning that said funds cannot be forfeited, and the policyowner is entitled to such values."

Some (although not all) insurance policies do give you that option. Whole life insurance, variable life insurance and universal life insurance typically have cash value components, which means that if you surrender your policy, you may get some money back. Term life insurance policies do not offer a cash value option.