Important Facts

Can I Cancel My Life Insurance If I Need Money?

Canceling your life insurance because you need money may not be the only option you have. There are certain types of policies with a cash value that may be a potential source of funds. 

Before You Cancel Your Life Insurance Policy

Life insurance policy cash options

Are you in a tough financial spot and thinking about canceling your life insurance? If you have a permanent life insurance policy - such as whole or universal life - you may have another option in which to access the cash in your policy besides canceling it. In fact, one of the many benefits of having a permanent life insurance policy is its potential to earn cash-value over time, making it a possible source of funds that you can tap into by way of a policy loan or partial withdraw.

Here's what you need to know about getting money from your life insurance policy without having to give up all of your coverage:

A policy loan

Generally, most cash-value life insurance will allow you to borrow money by way of a policy loan. However, while you don't need to financially qualify to get your loan, there is a limit as to how much you can borrow based on the value of the policy's cash-value and the terms of your contract.

A policy loan is like any other type of loan in that if you don't make payments, interest will accrue; and if the interest is not paid, it will be added to your loan balance increasing the amount you owe. If you allow the policy to lapse with an outstanding loan, or if you later decide to surrender the insurance, any money you borrowed may be subject to taxation. But more importantly, if you were to die before the loan's outstanding principal and accrued interest are paid, that amount will be deducted from the death benefit of your life insurance policy.

A partial policy withdrawal

In addition to borrowing against your policy by way of a loan, you may also have the option to withdraw a limited amount of cash from your life insurance policy, depending on the type of policy you own, the issuing company, and the terms of your contract.

A policy withdraw is considered to be a partial surrender of the net cash value of your policy, resulting in a reduction of the death benefit - as well as any cash accumulation value that may have been accrued. The main difference is that with a loan, you are not actually withdrawing money, but instead, the insurance company is lending you the cash and holding your policy as collateral. And while a loan can be repaid at any time as long as the policy is in force and before the insured dies, a partial withdraw cannot be repaid. Furthermore, depending on your policy's terms, your withdrawal will likely be subject to a surrender charge, which can be significant.

When considering a life insurance policy withdraw, it is important to factor in the possible effect on your tax situation, as well as the amount of death benefit that may (or may not) be received by your beneficiaries. If you're unclear as to how a withdrawal may affect your life insurance policy, discuss your specific contract with your company representative.

The bottom line

Don't allow an economic hardship to result in a policy cancelation. If you need money, it's important to first explore all of your loan alternatives - even before considering borrowing against or withdrawing from your life insurance policy. Why? Because borrowing or withdrawing from your policy could jeopardize the very reason for purchasing insurance in the first place - the security and welfare of your beneficiaries. There's no substitute for having the right amount of life insurance. Keeping your policy active should be a priority - fortunately for most policyholders, it is.

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

Understanding How A Cash Withdrawal Can Affect Your Life Insurance Policy

If you're paying life insurance premiums and considering canceling your policy because finances are stressed you need immediate cash, don't! If you absolutely need money and own a permanent life insurance policy, you may be able to borrow against your policy by taking out a loan or a partial policy withdraw. This article presents a high-level overview of some of the basics regarding life insurance policy loans and policy withdraws. For more information, visit the Protective Life Learning Center.

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