You can cash out universal life insurance. You may choose to withdraw all of its accumulated cash value and end your coverage, though there are other ways of taking cash out of your policy without “cashing out” entirely.
The right strategy for you depends on your long-term goals, the money you have saved up, and your life insurance needs. If you want to keep your death benefit, you may want to rethink completely cashing out your life insurance.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
What does cashing out universal life insurance mean?
The cash value account of universal life insurance grows as it gains interest and you pay your premiums. After enough time, you may think about cashing out, which means taking out all or some amount of money from your policy’s cash value account while you’re still alive.
Cashing out your universal life insurance doesn’t involve you getting your policy’s death benefit. While some types of life insurance have living benefits that may draw on the death benefit, you can’t actually withdraw the death benefit.
How to cash out universal life insurance
To completely cash out your universal life insurance, you take out all of the money in your policy’s cash value account. Doing this will completely end your coverage and might lower the amount of money you actually receive, your policy’s surrender value.
There are usually three alternatives to completely cashing out your policy and ending your coverage that still allow you to take money out of your universal life insurance:
Take out a loan. You can take out a loan against the value of your universal life insurance policy’s cash value. Usually these loans are easier to get and have lower interest rates than loans from a bank.
Withdraw cash. You can withdraw part of your policy’s cash value instead of the entire account balance. Life insurance companies may limit what you can take out at once or over a certain time period.
Pay your premiums. While it’s not exactly a way to access your cash directly, you can use your policy’s cash value to pay your premiums instead of paying for them out of pocket.
What will happen to my life insurance if I cash it out?
If you cash out your universal life insurance completely, your coverage will end and you (and your dependents) will lose out on the death benefit. At the same time, you’ll receive the cash value of your policy in a lump sum payment, though you may only end up with part of it.
Universal life insurance policies have rules about when you can fully withdraw your cash value. If you try to cash out too early, usually within the first 10 to 15 years of taking out your policy, you’ll face steep surrender fees that eat away a significant amount of your total cash value.
It’s different when you only partially cash out your life insurance. Your coverage won’t end, but, if you take out a loan and don’t pay it back or withdraw money, you may see your death benefit decrease.
Should I cash out my universal life insurance?
It depends. Before you cash out your universal life insurance, you’ll want to make sure that any potential gains outweigh the loss of the permanent death benefit.
If the surrender fees your policy has are high and you stand to come away with little or no cash value, you may want to rethink cashing out your life insurance unless you can’t afford to pay your premiums anymore — or consider selling your policy instead.
It may make sense to cash out your universal life insurance once your needs change, like later in life once your children have grown up, you’ve paid off your debt, and saved up for retirement. At this point, you might cash out to use your policy’s cash value at once or over time to use while you’re still alive.
