© 2020 USA TODAY, a division of Gannett Satellite Information Network, LLC. We’ll help you weigh the benefits and drawbacks of cashing in your whole life insurance policy. Whole life dividends are therefore considered a tax-free return of premium up to the extent of … And if you pass away, leaving a spouse behind, he or she can collect Social Security survivors benefits which, spread out over time, might easily mimic the death benefit your life insurance would pay out. The two most common types of life insurance are term life and cash value. Stock Advisor launched in February of 2002. There seems to be a … For whole life policies, by definition of the policy structure, payment of the premium is guaranteed to keep the policy in force and the cash value increasing, although the net return may still be extremely low. So yes, a whole life insurance policy can be cashed in. The plan has been paid for by dividends after 20 years of premiums. If that happens, you may have no choice but to drop your coverage, leaving your loved ones vulnerable. That’s a good thing. This is important. Term life insurance and whole life insurance are two common types of life insurance. This is a set amount that you get upon death, or, in some cases, you can get in case of a terminal diagnosis.The second portion of this policy is the cash value. Life insurance isn’t to protect you, it’s to protect those you love. Don’t be so excited to get rid of life insurance that you ignore some level of need you may still have. That is one of the myths of cash-value life insurance — that it is an investment. If you're horrible at money management but can swing your premiums for the long haul, then a whole life policy could serve as a means of forced savings, since you'll eventually have the option to tap your policy's cash value. Depending on your current quality of health, that might not be great. Life insurance is meant to help your family accomplish your financial goals, whether you’re there or not. The most common type of life insurance that gets dropped is term insurance. And to be clear, that 7% average annual return is considerably higher than the likely annual return on a whole life policy's cash value. The easy answer to drop your term life insurance is when you goal for that plan is met. If you turn around and invest that sum steadily in stocks, you should have little trouble generating an average annual 7% return -- that's actually a few percentage points below the stock market's average. But not all life insurance is created equal, and if you're in the market for a policy, it pays to consider term life insurance rather than whole life. For example, if you purchased the plan to cover a 30 year mortgage and paid it off early and have no further need for the protection you should drop it. It's that cash value that gives whole life insurance its appeal. Dave's ANSWER: You should close it once you have term life insurance in place. I currently have $500,000 worth of life insurance, but once the kids moved out and I fully funded my retirement income strategy, the half-million amount seems excessive. However, since they are tied to a Whole Life insurance policy, these dividends are technically considered to be a refund of overpaid premiums by the mutual insurance company. I’ve been there to help pick up the pieces for those with life insurance and for those without life insurance. This means that it accrues a cash value in a separate account to the death benefit. By converting your policy, you’ll be able to convert at your old health rating. Grab some permanent coverage and be glad that you’ve been there to celebrate your family’s monumental moments. That’s where your question gets a bit hairy. The answers: Yes and yes. It’s term insurance, and it's about to increase in price. Peter Dunn is an author, speaker and radio host, and he has a free podcast: "Million Dollar Plan." "Often [whole life insurance policies] are dropped when people fail to see the 'gains' materialize that they thought would come out of them. You might be less healthy than you were when you purchased the term policy years ago. And while tapping retirement funds early to cover other financial needs generally isn't an ideal choice, you do have some flexibility when it comes to those accounts. Insurance brokers may appeal to the logic that, because a whole life policy covers you for life, your family is guaranteed a payout. Can I Cash In A Whole Life Insurance Policy? Both situations are awful, but the ones with life insurance at least allow the survivors to breathe. The reason usually being that the term period on the policy is expiring/has expired and the premiums start increasing. First, understand that for any given death benefit, your monthly premium for a whole life policy will be much, much higher than for a term life policy. Darlene’s instincts are correct. You access this money by taking a loan from your policy. Now you may be thinking: "But what happens if I opt for term life insurance and my coverage runs out?" Now, we are at the point where we could drop the life insurance and reduce the disability. This is what makes universal life insurance policies so much more expensive than term policies. Once you have decided you are going to cancel it, there is no point in waiting a few more years until it breaks even or gives you a certain return you will feel good about. Option 1: Cancel Whole Life Insurance. It’s important that you don’t drop your life insurance before you have carefully reviewed your finances, says life insurance provider Matt Schmidt. You can withdraw IRA funds to buy a home, for example, and you can borrow from your 401(k) if you must. However, the prospective return characteristics of life insurance policies are different when accounting for the death benefit. Life insurance rules and plan availability may vary depending on the state you live in. Buy life insurance only if someone you love will suffer financially by your death. Dear Pete: I’m 57 years old, my kids are grown and out of the house, and I don’t really feel like I need all the life insurance I once carried. If those you love don’t need protection, then you don’t need life insurance. Rather than canceling your whole lie insurance policy if the going gets tough, you have several options to reduce payments or stop paying altogether, and still keep everything you love. That means once you retire, if income sources remain stable regardless of whether you walk this earth or not, then the need for life insurance may no longer exist . Life insurance is intended for is the financial loss or hardships that someone might experience should your life end. The bottom line is this: If you have the means to pay hefty whole life premiums over time, you have the means to put those same funds into tax-advantaged retirement plans and invest them the way you want to. Term life insurance, as the name implies, covers you for a specific period of time -- its term. Certainly a frustrating outcome, but it’s not frustrating enough to ignore the realities of your permanent life insurance need. You'll often hear that if you have people in your life who depend on you financially, or who stand to suffer financially in the event of your untimely passing, then having a life insurance policy is a must. Market data powered by FactSet and Web Financial Group. It costs about one twentieth of what whole life costs. Face Value Versus Cash Value . Returns as of 12/29/2020. Looking at your situation, I think you’re potentially in a position to reduce the amount of coverage you have, but you still need some coverage. 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