Author Topic: Cashing out Life Insurance...Just get a Check? Any Other Advice?  (Read 972 times)

uneven_cyclist

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Cashing out Life Insurance...Just get a Check? Any Other Advice?
« on: December 01, 2022, 08:22:34 PM »
Hello all -- my wife has a life insurance plan that she's had since she was a child and we are thinking that it probably makes sense to cash it out. 

Policy details:

Death Benefit: $60k
Policy Debt: $7k (my wife took a loan to pay for school several years ago and never repaid)
Cash Value: $14k
Net Cash Value: $7k (This is the cash value minus the debt)

Life situation details:

The Death Benefit would be helpful but not a game changer for our family at this point since our net worth has climbed well beyond that figure.

Questions:

1) Does it just make sense to cash out and put the $$ into our investments (IRA etc?)
2) When cashing out a policy like this, is it necessary (or common/sensible etc) to roll the $$ into an IRA or do people usually just take a check?  I don't even know if you *can* do that...What is the best practice?
3) Any other considerations to take into account?

I would be grateful for any info...at this point we're pretty sure that we'll just cash out, but wanting to make sure we don't make any dumb mistakes.

Thanks!!




plog

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Re: Cashing out Life Insurance...Just get a Check? Any Other Advice?
« Reply #1 on: December 02, 2022, 12:10:25 AM »
1. Yes.

2a. Not necessary, who cares what's common, probably sensible.

2b. Best practice is probably some sort of electronic transfer.

3. Just the obvious but easily overlooked -- you won't have life insurance from this source any longer.  If you still need insurance get the appropriate term life in place before cancelling this one.

Freedomin5

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Re: Cashing out Life Insurance...Just get a Check? Any Other Advice?
« Reply #2 on: December 02, 2022, 02:00:13 AM »
Do you still have to pay a premium on this policy? Or are the returns generated enough for the policy to maintain itself? I have a policy that was opened when I was a child. The premiums are so low and the returns are sufficient to cover the premiums that itís basically $250k free to my beneficiary when I die, so Iím just leaving it alone. Plus, I think insurance proceeds are not taxed in my province so it helps with wealth transfer.

uniwelder

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Re: Cashing out Life Insurance...Just get a Check? Any Other Advice?
« Reply #3 on: December 02, 2022, 04:04:59 AM »
Posting to follow. I have a 25k policy from when I was a minor, with 1k cash value. The interest return covers the premium, so I havenít bothered paying further into it or cashing it out. Iím curious to read what responses OP gets.

uneven_cyclist

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Re: Cashing out Life Insurance...Just get a Check? Any Other Advice?
« Reply #4 on: December 02, 2022, 11:42:18 PM »
Thanks all for your replies.  I looked into it a bit more and discovered that it would actually not be possible to do any kind of rollover unless I were to rollover into another life insurance policy or maybe an annuity.

However, it also seems that the tax penalties for cashing out these policies are also usually fairly low, since most of the time you only pay tax on any capital gains since policies are purchased with after-tax dollars -- *I am parroting other forum posts here, so please do not go off of this 100% without doing your own research, but that's what I have been able to gather from other posts*.

So...I think we'll just cash out, take the check (or electronic transfer as one responder mentioned -- will look into that) and put it into an index fund. 

Although $60k would not be insignificant in the possible event of tragedy right now, I feel quite a bit more peace of mind putting the $7k into an index fund with the knowledge that it will likely grow to 50-100x that amt by the end of my life, assuming I don't die prematurely.

If anything weird comes up during the process, I'll share details here.  Thanks again all for your input!

Car Jack

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Re: Cashing out Life Insurance...Just get a Check? Any Other Advice?
« Reply #5 on: December 03, 2022, 04:25:00 PM »
I think you've made the right decision.  I had a universal life policy my dad took out for me.  He paid the premiums for many years, especially when I was in college.  I eventually got the in force illustration and learned that universal life insurance premiums went up every year and the cash value went down.  After 27 years, I cashed it out.  The taxable amount?  $20.  Not $20 tax....I paid tax on that $20.  The good thing was that my dad owned an insurance agency so he would have collected all of the commissions from this policy.

reeshau

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Re: Cashing out Life Insurance...Just get a Check? Any Other Advice?
« Reply #6 on: December 03, 2022, 04:56:46 PM »
You can't roll over the policy proceeds into an IRA or 401k, but you could do so indirectly if you are not already maximizing your options: use that money to make additional contributions to an IRA, or love on it, and max out your 401k contributions from your paycheck.

One point many people miss: the cash value of a policy only has significance if the policy is not actually used.  If you have a $100k whole life policy with a cash value of $20k, when you die your beneficiary gets $100k, not $120k.  If you plan to keep the policy until death, the cash value means nothing more than its ability to pay premiums.