Can I cash in my own life insurance policy?

Yes, you can cash in your own life insurance policy, but this depends on the type of life insurance you hold. Policies that allow cashing in are typically permanent life insurance policies like whole life, universal life, or variable life insurance, which accumulate a cash value over time. Here’s a detailed breakdown of how this works and what you should consider.

1. Term Life Insurance

• No Cash Value: If you have a term life insurance policy, you cannot cash it in. Term life insurance is purely for coverage over a specific period, and if you outlive the term, the policy expires without any payout (unless you pass away during the term).
  
  

2. Permanent Life Insurance

• Cash Value Accumulation: Permanent life insurance policies, such as whole life, universal life, and variable life insurance, build cash value over time. This cash value grows tax-deferred, and you can access it while the policy is in force.
  
  

3. How to Cash in Your Policy

There are a few ways to access the cash value in a life insurance policy:

• Surrendering the Policy: You can fully surrender your policy and receive the cash surrender value. This is the accumulated cash value minus any surrender charges and unpaid loans. Keep in mind that surrendering the policy cancels your life insurance coverage.

• Policy Loans: You can borrow against the cash value of your policy. The loan comes with interest, but you don’t have to repay it as long as the policy remains active. However, unpaid loans and interest will reduce the death benefit.

• Withdrawals: You can also take partial withdrawals from the cash value. However, this may reduce the death benefit and could have tax implications if you withdraw more than you’ve paid in premiums.

• Life Settlement: In some cases, you can sell your policy in a life settlement if you’re no longer in need of the coverage. This involves selling your policy to a third party for a lump sum payment, often more than the cash value but less than the death benefit.
  
  

4. Tax Implications

Be aware that cashing in a policy may have tax consequences. If the amount you receive exceeds the premiums you’ve paid, the difference may be taxed as ordinary income.

5. Alternatives to Cashing In

Before you cash in your life insurance policy, consider the following alternatives:

• Borrowing against the policy: This allows you to access funds without terminating the policy.
• Reduced paid-up insurance: Some policies allow you to reduce the death benefit in exchange for not paying future premiums, while still keeping the policy active.

If you own a permanent life insurance policy that has accumulated cash value, you can cash it in either by surrendering the policy, borrowing against it, or making partial withdrawals. However, always consider the potential impact on your death benefit and any tax implications before making a decision.