What Are the Pros and Cons of Cashing out Life Insurance?

Jeremy Laukkonen

There are many pros and cons associated with cashing out life insurance that should typically be taken into consideration. The main benefit that can be realized by cashing out life insurance is the monetary payout, which may be necessary to settle bills or health care costs. Another benefit is that the premium payment will no longer have to be covered. Potential drawbacks of cashing out life insurance include tax penalties and the loss of financial coverage for loved ones in the event of death. There are also specific pros and cons to using a life insurance settlement company, since the business activities of these entities are sometimes poorly regulated.

Cashing out life insurance will eliminate or reduce the payable death benefit.
Cashing out life insurance will eliminate or reduce the payable death benefit.

The benefits in cashing out life insurance are varied. Many policies allow a refund of part of the premium if a policy is cashed out before it expires. Other life insurance policies include an investment aspect, and these may even provide more money than was initially paid in premiums. Cashing these policies out can be especially attractive to seniors who may no longer work but are responsible for increasingly large medical expenses.

Another potential benefit of cashing out a policy is that it can free that money up to invest in a different or better policy. As circumstances change, a policy with a different term or other factors may seem more attractive. Many seniors may also become more interested in long term care insurance that can potentially increase their standard of living in the event that illness, disease, or old age renders them incapable of caring for themselves.

Some of the main cons associated with cashing out life insurance are tax related. For this reason, it can be very important to consult with a certified public accountant (CPA) before cashing out a policy. In some cases, there will be no tax liability if the payout is less than the total premiums that were paid, though this can differ from one area to another. If there will be a large tax liability from cashing out a policy, it may be less attractive to do so.

There are some unique pros and cons associated with cashing out life insurance through a settlement company. These businesses buy life insurance policies and typically pay more than the insurance company would if it was cashed out. This can allow the policy holder to get more money when cashing out, though these companies can be poorly regulated. It is important to research any settlement company before entering into a deal because the potential for a larger payout can go hand in hand with the possibility of fraudulent activity.

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