Can You Cash Out A Variable Life Insurance Policy?

Writing by Last Updated On: May 3, 2023
Rakibul Hasan
Chief Editor of - Free Insurance Tips

Meet Rakibul Hasan, the visionary leader and founder of Freeinsurancetips. With over a decade of experience in the insurance sector, Rakibul is dedicated to empowering...Read more

There are countless types of insurance policies available in the market, each designed to serve a specific purpose. One such policy is the variable life insurance policy. Unlike traditional life insurance policies that offer a fixed premium and payout, variable life insurance policies come with an investment component. This means that the cash value of the policy can fluctuate based on the performance of the investments made.

As with any investment, it’s essential to understand the terms and conditions of the policy before investing in it. One common question that policyholders have is whether they can cash out a variable life insurance policy. In this article, we’ll dive into the details of variable life insurance policies, explain how they work, and explore the options available to policyholders who want to cash out their policies.

Can You Cash Out a Variable Life Insurance Policy? Yes, you can cash out a variable life insurance policy. However, doing so may result in surrender charges and tax implications. Surrender charges are fees that the insurance company may charge if you cancel the policy before a certain period of time. The tax implications depend on the amount of cash value in the policy and your tax bracket. It is recommended to consult with a financial advisor before cashing out a variable life insurance policy.

Can You Cash Out a Variable Life Insurance Policy?

Can You Cash Out a Variable Life Insurance Policy?

Variable life insurance policies are a type of permanent life insurance that come with a cash value component. This means that over time, the policy can accumulate cash value that policyholders can use in a variety of ways. However, what happens if you need to cash out your variable life insurance policy? Is it possible, and what are the implications? In this article, we’ll explore the topic in more detail.

Understanding Variable Life Insurance Policies

Variable life insurance policies are a type of permanent life insurance that provide both a death benefit and a cash value component. The cash value portion of the policy is invested in a selection of sub-accounts (similar to mutual funds) that policyholders can choose from. The investment returns on these sub-accounts can vary, which means that the cash value of the policy can increase or decrease over time.

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The cash value of a variable life insurance policy can be used in a variety of ways. Policyholders can borrow against the cash value or use it to pay premiums. Additionally, if the cash value exceeds the cost basis (the amount the policyholder has paid in premiums), policyholders can withdraw the excess tax-free. However, if the policyholder wants to cash out the entire policy, there are some things to consider.

Cashing Out a Variable Life Insurance Policy

When you cash out a variable life insurance policy, you surrender the policy back to the insurance company in exchange for the cash value. The amount you receive will be equal to the cash value minus any surrender charges or fees. Surrender charges typically decrease over time, so policyholders who have had their policies for a longer period of time may have lower surrender charges.

It’s important to note that when you surrender a variable life insurance policy, you may be subject to taxes on any gains in the policy. The gains are taxed as ordinary income, not capital gains, which means that the tax rate can be quite high. Additionally, surrendering a policy will void the death benefit, so if you still need life insurance coverage, you’ll need to purchase a new policy.

Benefits of Cashing Out a Variable Life Insurance Policy

There are several benefits to cashing out a variable life insurance policy. For one, it can provide policyholders with a lump sum of cash that they can use for any purpose. Additionally, if the policyholder no longer needs life insurance coverage, surrendering the policy can be a way to free up money that would otherwise be tied up in premiums.

Another benefit is that surrendering a policy can be a way to simplify your finances. If you have multiple life insurance policies or investment accounts, consolidating them by surrendering a variable life insurance policy can make it easier to manage your money.

Drawbacks of Cashing Out a Variable Life Insurance Policy

While there are benefits to cashing out a variable life insurance policy, there are also some drawbacks to consider. For one, surrendering a policy will result in the loss of the death benefit. If you still need life insurance coverage, you’ll need to purchase a new policy, which may be more expensive depending on your age and health.

Additionally, surrendering a policy can result in taxes on any gains in the policy. The tax rate can be quite high, which means that the amount of cash you receive may be significantly less than the cash value of the policy.

Cashing Out vs. Borrowing Against a Variable Life Insurance Policy

If you need cash but don’t want to surrender your variable life insurance policy, borrowing against the cash value can be an option. When you borrow against the cash value, you’re essentially taking out a loan from the insurance company. The loan is secured by the cash value of the policy and typically has a lower interest rate than other types of loans.

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One benefit of borrowing against a variable life insurance policy is that it doesn’t result in the loss of the death benefit. Additionally, the loan doesn’t need to be repaid, as the insurance company will simply deduct the outstanding loan balance from the death benefit when the policyholder passes away.

However, borrowing against a policy does come with some drawbacks. For one, the interest on the loan will continue to accrue, which means that the cash value of the policy may not grow as quickly. Additionally, if the policyholder passes away before the loan is repaid, the outstanding balance will be deducted from the death benefit.

Conclusion

Cashing out a variable life insurance policy can provide policyholders with a lump sum of cash that they can use for any purpose. However, it’s important to consider the tax implications and the loss of the death benefit before making a decision. Borrowing against the cash value can be an option for policyholders who need cash but don’t want to surrender their policy, but it’s important to understand the drawbacks as well. Ultimately, the decision to cash out or borrow against a variable life insurance policy will depend on each individual’s unique financial situation.

Frequently Asked Questions

Can you cash out a variable life insurance policy?

Yes, you can cash out a variable life insurance policy. However, the process may differ depending on the type of policy and the insurance provider. It is important to note that cashing out a variable life insurance policy may result in tax consequences.

Before cashing out a variable life insurance policy, it is important to consider the surrender charges and fees associated with the policy. These charges can be significant and may reduce the amount of cash value that you receive. Additionally, cashing out a variable life insurance policy may impact the death benefit that your beneficiaries will receive.

What are the options for cashing out a variable life insurance policy?

There are several options for cashing out a variable life insurance policy. One option is to surrender the policy and receive the cash value. Another option is to take out a loan against the cash value of the policy. This option allows you to access the money without surrendering the policy, but you will need to pay back the loan with interest.

A third option is to use a life settlement company to sell the policy for a lump sum payment. This option may be beneficial if you no longer need the death benefit and are looking for a way to access the cash value of the policy.

What are the tax implications of cashing out a variable life insurance policy?

Cashing out a variable life insurance policy may result in tax consequences. Any gain on the policy, which is the difference between the cash value and the premiums paid, may be subject to income tax. Additionally, if the policy was owned by a trust, the tax consequences may be different.

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It is important to consult with a tax professional before cashing out a variable life insurance policy to understand the tax implications and potential penalties.

What happens to the death benefit if I cash out a variable life insurance policy?

If you cash out a variable life insurance policy, the death benefit will be reduced or eliminated depending on the amount of cash value that you receive. It is important to consider the impact on your beneficiaries before cashing out a policy.

Additionally, if you have outstanding loans against the policy, the amount of the loans may be deducted from the death benefit. It is important to understand the terms of the policy and any outstanding loans before making the decision to cash out a variable life insurance policy.

Should I cash out my variable life insurance policy?

The decision to cash out a variable life insurance policy depends on your individual circumstances. If you no longer need the death benefit and could benefit from the cash value, it may be a good option. However, it is important to consider the surrender charges, fees, and tax consequences before making the decision.

Additionally, if you have dependents who rely on the death benefit, it may not be in their best interest to cash out the policy. It is important to weigh the pros and cons and consult with a financial professional before making any decisions about your variable life insurance policy.

As a professional writer, I can attest that variable life insurance policies are a complex financial product. The ability to cash out a variable life insurance policy is a question that many policyholders have. The answer to this question is not straightforward, as it depends on various factors such as the policy’s terms and the current market conditions.

If you are considering cashing out a variable life insurance policy, it is crucial to consult with a financial advisor who can guide you through the process. With their expertise, you can evaluate the benefits and drawbacks of cashing out your policy and determine if it is the right decision for your financial goals. While the process may seem daunting, with the right support, you can make an informed decision that aligns with your financial objectives.

Rakibul HasanChief Editor of - Free Insurance Tips

Meet Rakibul Hasan, the visionary leader and founder of Freeinsurancetips. With over a decade of experience in the insurance sector, Rakibul is dedicated to empowering individuals to make well-informed decisions. Guided by his passion, he has assembled a team of seasoned insurance professionals committed to simplifying the intricate world of insurance for you.

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