Many people are unaware of the fact that certain life insurance policies can be encashed before maturity. There are certain times in life when a person is facing significant financial troubles. With no other choice in sight, life insurance coverage can fulfill these needs. However, there are some technicalities involved with encashment of life insurance policies as William Schantz explains in the following text:
Which Life Insurance Policies Can Be Encashed
According to Schantz, there are drawbacks to cashing in a life insurance policy, but when there is no other choice, it can be done. Cash-value policies for example universal and whole life insurance are designed in a way that they build monetary reserves against additional premiums combined with interest earnings. The accumulated cash is then held in an account incorporated within the policy. This cash can be accessed by the policyholder under certain conditions.
How Can Policies Be Cashed per Schantz?
There are various ways in which a cash-value insurance policy can be turned in for financial benefits. Individuals can make withdrawals, take policy loans or choose between partial and full surrender of the coverage. The complete policy can also be sold for its face value. This action is known as life settlement. Third parties are involved in the process and a lump sum cash payment is made to the policy holder allowing them to address their urgent monetary needs.
Consequence of Cash Withdrawals
Certain policies allow a limited chunk of cash to be withdrawn from the cash accumulation account within the coverage. William Schantz notes that this amount is not taxable unless the policy is classified as a Modified Endowment Contract (MEC). Cash withdrawals reduce death benefits that come with an insurance policy. Withdrawals are also not always tax-free with any amount in excess of the basis in policy can attract certain taxation.
Schantz Describes Policy Loans
You can borrow money from the issuer using your cash-accumulation account as security in most cash-value plans. The loan may be subject to interest at various rates depending on the terms of the insurance; nevertheless, you are not needed to be financially qualified for the loan. This loan can act as a buffer to provide temporary benefits in times of emergencies. The amount you can borrow is determined by the cash-accumulation account value and the terms of the policy.
The final option to get cash against a life insurance policy is by surrendering, i.e. canceling it altogether. This means that you deliberately make a choice to forego a significant retirement or post-mortem financial plan in order to address a current crisis. If the policy is surrendered during early years, a certain percentage is charged as fees, which ultimately lowers the cash value, notes Schantz. The fees can vary depending on how long a policy has been held.
Cash value life insurance policies contain clauses that allow holders to gain limited financial benefits from them even during their lifetime asserts William Schantz. However, this is not a recommended action as it brings a lot of drawbacks like the cancellation of the policy completely or reduction in its residual value.