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Whole life insurance is a versatile financial tool that can provide added protection for your loved ones. If you pass away, your loved ones can help replace some of your income or save for the future using your policy’s death benefit payout. Plus, its cash value growth component can offer a wealth-building opportunity. It can grow with each payment, earning tax-deferred interest. Additionally, there are some ways you can tap into your cash value once it’s large enough. Let’s dive deeper into how cashing out a whole life insurance policy works.
There are several ways to cash out whole life insurance. Ensure you consult your tax advisor because each one varies in benefits, drawbacks, and potential tax consequences:
Whole life insurance lets you borrow at low rates with no credit check or fixed repayment date. In some cases, you may not owe taxes on borrowed amounts, and your death benefit doesn't decrease. This offers a flexible way to access extra cash for various purposes.
However, interest accumulates on your outstanding balance. If the balance exceeds the cash value, your policy could lapse. This may result in a taxable event since you don’t have to repay a loan on a canceled policy.1 Therefore, careful management of the loan is critical.
Policies also let you withdraw cash from the policy to avoid having to repay a loan. However, withdrawing cash value interest gains or withdrawing more than your total premiums paid may result in tax consequences.1
If you no longer need coverage or don’t want to continue paying premiums, you can simply surrender the policy to terminate the policy and receive the cash value. Depending on when you surrender, you may have surrender charges deducted from the cash value. These decrease with time, and if you surrender late enough, you may not owe surrender charges.
Just like with other methods, you may owe taxes on interest earnings you receive by surrendering the policy.1 For example, if you receive a $20,000 cash value payout, and $2,000 is from interest, you may owe taxes on that $2,000. You may also owe taxes if you receive more than the cost basis or had any outstanding loans when you surrendered the policy.
Another option for getting rid of your policy is to sell it, which is called a life settlement. Selling requires more work but may result in a larger payout than a policy surrender. In general, you must sell your policy to a licensed life settlement company. These companies exist to purchase life insurance policies and receive the death benefit when the policyholder passes away.
To get a life settlement, you can research life settlement companies to find some reputable options and apply to each one. Underwriters at each company will evaluate whether your policy is a good investment and may provide you with an offer. You can then pick the best offer, finalize the details, and sign the documents to transfer the policy to the life settlement firm.
Since the process is more complicated, you can hire a life settlement broker to handle the complex parts of the process. Furthermore, you may owe taxes on some of the proceeds, depending on the settlement amount.1
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
There is no penalty for cashing out whole life insurance because these policies are designed to offer the opportunity to build wealth. However, surrendering the policy may result in surrender charges if done before a specified date. Additionally, you may face tax consequences for withdrawals, loans, and policy surrenders depending on the amounts received and cash value growth.
Many advisors generally recommend waiting at least 10 to 15 years to cash out your whole life insurance policy.2 The policy must grow large enough for you to access it without causing problems for your coverage.
Even if you’ve waited for several years, cashing out the policy is not always a good idea. Consider whether you still need the same amount of life insurance coverage and the potential tax consequences before making your decision.
Although cashing out a policy can provide significant funds, the downsides may not be worth it in some situations. Here are some alternatives to consider if you need access to funds:3
Cashing out your whole life insurance can offer substantial financial assistance for various purposes, from covering unexpected expenses to accelerating your progress toward financial goals. However, it’s important to be aware of the potential tax consequences and other considerations. Now that you understand the benefits and risks of cashing out your policy, speak with an Aflac agent to learn more about our life insurance policies and get a quote.
1 MarketWatch - Is Cash Value Life Insurance Taxable? | 2024 Guide. Updated April 13, 2024. https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance-taxable/. Accessed April 29, 2024.
2 Investopedia - Cashing in Your Life Insurance Policy. Updated August 1, 2024. https://www.investopedia.com/articles/pf/08/life-insurance-cash-in.asp. Accessed April 29, 2024.
3 Forbes – How to Cash Out a Life Insurance Policy. Updated October 10, 2023. https://www.forbes.com/advisor/life-insurance/cash-out-life-insurance/. Accessed April 29, 2024.
4 IRS - Considering a loan from your 401(k) plan? Updated April 18, 2024. https://www.irs.gov/retirement-plans/considering-a-loan-from-your-401k-plan. Accessed April 29, 2024.
5 IRS - Topic no. 409, Capital gains and losses. Updated January 30, 2024. https://www.irs.gov/taxtopics/tc409. Accessed April 29, 2024.
The content herein is provided for general informational purposes and is not provided as tax, legal, health or financial advice for any person or for any specific situation. Employers, employees and other individuals should contact their own advisers about their situations. Receipt of accelerated death benefits may affect eligibility for public assistance programs. Benefits may also be taxable, and are not expected to receive the same favorable tax treatment as other types of accelerated death benefits that may be available.
Coverage underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.
Life (A68000 Series and Rider A68054)- In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400.
In Virginia, Policies ICC0965JTO & ICC0965JWO. 65000: In VA, Policies ICC0965JTO & ICC0965JWO. B61000: In AR, ID, OK, OR, PA, TX, & VA, Policies: ICC18B61JWO & ICC18B61JTO. In DE, Policies B61JWO, B61JTO. B6000: In AR, ID, OK, PA, TX, & VA, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q6000 Whole: In AR, DE & OR, Policy Q60100M. In ID Policy Q60100MID. In OK, Policy Q60100MOK. In PA, Policy Q60100MPA. In TX, Policy Q60100MTX. Q6000 Term: In DE, Policies Q60200M. In AR, ID, OK, OR & TX, Policies ICC18Q60200M, ICC18Q60300C, ICC18Q60400C.
Aflac Final Expense insurance coverage is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
In AR, DE, ID, OK, and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Aflac Final Expense policies are not available in New York.
This is a brief product overview only. Coverage may not be available in all states including but not limited to DE, ID, NJ, NH, NM, NY, or VA. Benefits/premium rates may vary based on plan selected. Optional riders are available at an additional cost. The policy has limitations and exclusions that may affect benefits payable. Refer to the policy for complete details, limitations, and exclusions. For costs and complete details of the coverage, please contact your local Aflac agent.
Aflac WWHQ | Tier One Insurance Company | 1932 Wynnton Road | Columbus, GA 31999
Aflac New York | 22 Corporate Woods Boulevard, Suite 2 | Albany, NY 12211
Z2400447
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