When it comes to life insurance, most of us know that we get it to help protect our families if something were to happen to us. But did you know that you can also cash in your life insurance policy? It’s true, but you should know a few things first. Read on to learn more about cashing in your life insurance policies and how it affects your taxes.
Types Of Life Insurance Policies
Numerous life insurance policies are available so that you can tailor the coverage to your specific needs and life stage.
Selling a life insurance policy could be a good option if you’re faced with urgent financial obligations. It is important to note that any money made from the sale of the policy is considered taxable income, unless it’s a viatical settlement.
To understand tax liabilities, speaking with a financial planner or professional who manages taxes and finances can be beneficial. Doing so could save you from a surprise come tax season!
How To Withdrawal From A Life Insurance Policy Without Tax Implications
If you’re looking to withdraw from your life insurance policy without facing tax implications, the best way is to borrow or withdraw from the policy’s cash value, our sell your policy through a viatical settlement. This money will be tax-free as long as it is used for premiums or other specified expenses. Most whole and universal life insurance policies come with a “cash surrender” option that allows you to take out a loan against the funds in the account.
Remember, each situation is different, so talk to your life insurance provider or financial advisor about the best way to withdraw from your policy without facing tax implications.
Taking A Loan From Your Life Insurance Policy
Taking a loan from your life insurance policy is another great way to withdraw money without paying taxes. You can use the money for whatever you need. Most insurers offer these types of loans at reasonable interest rates.
One thing to note about borrowing from your life insurance policy is that if you don’t repay the loan, the total death benefit will be reduced by the amount you borrowed. So, it’s important to think carefully before taking out a loan and make sure you can afford to repay it.
What Happens When You Surrender A Whole Life Policy?
When you surrender a whole life policy, the insurance company will cash out the cash value of the policy minus any fees, taxes, or other charges. If there is not enough cash value to cover these expenses, you may be responsible for paying them yourself. In addition, if you have previously taken out loans against your policy, these must also be repaid.
Once the policy is surrendered, you will no longer have any coverage and will not receive a death benefit. Also, depending on your state, you may be subject to surrender charges or other penalties if you are younger than the designated age limit (usually around 65).
Overall, it is important to consider the implications of surrendering your whole life policy before doing so. Although it may provide immediate cash, the drawbacks should be considered.
What Happens When You Withdraw A Portion Of The Cash Value Of A Life Insurance Policy?
When you withdraw a portion of the cash value from your life insurance policy, this is like taking out a policy loan. The money will be paid to you directly and will not be subject to taxes (unless the policy was funded with pre-tax dollars). However, it is important to note that if you do not repay the loan, you could face a tax penalty or be required to surrender the policy. Additionally, if you withdraw more money than the cash value of your policy, you may also be subject to additional fees.
How Can I Avoid Paying Capital Gains Tax?
The best way to avoid paying capital gains tax on life insurance cash outs is to ensure that all policies are properly funded with already taxed income and transferred into irrevocable trusts before death occurs.
Consulting with a knowledgeable financial advisor can help ensure that all policies meet IRS requirements. Advisors can also provide additional guidance on other options for avoiding taxes on life insurance cash outs.
Turn Your Life Insurance Policy Into Cash Through A Viatical Settlement
At American Life Fund, we specialize in helping policyholders turn their life insurance policies into cash through our viatical settlement program. Viatical settlements allow someone diagnosed with a life-threatening illness to sell their life insurance policy for cash. This person is known as the “Viator.”
The third party they sell their policy to is an institutional investor, usually a viatical settlement company such as us here at American Life Fund. When selling a policy in a viatical settlement, the policyholder sells it for more than the surrender value but less than the total death benefit.
When you receive the funds, they’re yours. There are no strings attached and no limits on usage – whether you want to buy a house, a car, or a piece of art or pay off debts for yourself or your family. Viatical settlements are not treated as part of your income, so the lump sum payment you receive for selling your policy will not be taxed.
When withdrawing from your life insurance policy, borrowing or withdrawing from the policy’s cash value is the best way to avoid taxes.
Taking a loan from your life insurance policy can effectively access money without paying any taxes.
Surrendering a whole-life policy will mean you forfeit all coverage and any associated death benefits.
When taking out a loan against your policy, you must make sure you can repay it to avoid reducing the policy’s death benefit.
Consulting a knowledgeable financial advisor can help ensure all policies comply with IRS regulations and provide additional guidance on other options for avoiding taxes when cashing out life insurance. By being aware of the different ways to access money from your policy, you can make the most of it and ensure that it provides optimal protection and financial security for your family.
If you want to see how much you can get for your policy with a viatical settlement, complete our simple form for your instant offer estimate!
In 2005, Gene Houchins founded American Life Fund Corp, addressing a significant gap in the life insurance industry. As its leader, Gene's organization specializes in providing swift financial support for those with severe illnesses, assisting in both medical and living expenses with viatical settlements. His expertise also extends to counseling seniors on managing their life insurance policies.
Disclaimer: American Life Fund is not a licensed provider and may not be licensed in your state. Principles hold brokers license in various states nationwide. Due to life settlement regulations varying state by state, our services are not available to residents in all states, including Georgia and Florida. The content contained in this website is not applicable for consumers in states where American Life Fund is not permitted to make life settlement transactions, solicit or advertise. Any offer is conditional, contingent upon written terms and conditions, and is non‐binding, as well as subject to due diligence and execution of closing documents.