Cashing in one's life insurance policy?

I have a life insurance policy that’s about 9-10 years old. It was sold as something called a whole-life with a term rider. We were young, we had just bought our first house, and we thought this was a good deal.

I don’t want or need this policy anymore. Since suicide is not an option, can I cancel the policy and get the cash value? Are their tax consequences for such a thing? Has anyone ever done anything like this before? I plan on contacting the company soon, but any advice/anecdotes would be appreciated.

Yes you can cash in the policy it is done all the time.
However there are a few things you might consider before doing so. Depending on the company and the contract after 9 or 10 years the cash value increase each year might well outstrip the premiums paid in. If you contract is with a mutual company the dividends will also help this difference.
Again with a mutual company the dividends can be used to reduce premium if you wish, making the premium less each year.
Talking to a financial advisor is a very good idea, I recommend it.

Oh come now. It’s always an option, and some even say it’s painless!

As for the OP, **Rick ** scooped me again! So, in addition to agreeing like a toad with him I’d like to clarify: If your policy is paying dividends, and especially if you elected to allow the dividends to accumulate and accrue annually compounding interest, there is a possibility that the policy is accruing dividend & interest in an amount equal to or greater than your annual premium. In English, your policy at this point might be “paying for itself” : dodges brick thrown by insurance professionals : and will require little or no more money from your checkbook. The term to drop in your life insurance guy’s lap is “premium offset.” : dodges rotten tomato :

I’m dodging because life insurance policies do not “in fact” pay for themselves, and although dividends may be paid regularly, they are not guaranteed–they are the result of good financial health of the insurer. If things go badly for the company, they might stop paying dividends for an unspecified period of time, and if that happens you will need to start ponying up money again. An asteroid can hit the earth too, and you wouldn’t want to be without insurance if that happened!

Free life insurance or cash it in (and show earned interest as earned income)? That’s the question. Before you cash in, consider that nobody EVER complains when a life insurance benefit check is delivered.

Cash in the Whole Life policy and dump it all into a Variable Life Insurance policy and work it for a permanently tax-deferred investmen…er…never mind. Forget I said anything. :cool:

I’m not getting dividends, as far as I know. I’ve been paying the same amount each month since I got the policy, and I’ve never gotten a check in return. When we bought our house about four years ago they listed the policy as one of our assets. Its value at that time was several thousand dollars.

Are there tax consequences to cashing in a policy? I’m sure I’ll get a hard time from the company, and they’ll try to get me to convert the policy to something else. I will stand firm. I want the money.

A regular standard run of the mill Life policy will have no tax impact when cashed in.
If it was somehow purchased with before tax dollars, this answer would be different.
Just because you have not seen dividends does not mean you have not received any. They could be accruing with the company.

Another, perhaps irresponsible, suggestion is to borrow against it. This is often really easy and usually quite cheap.

Is there a market in the USA for traded life insurance policies? Such markets exist in both Australia and the UK for whole of life and endowment policies, so I’d be surprised if there wasn’t something similar in the much bigger American market.

Instead of surrendering (cashing in) your policy, you sell it to a third party in the traded market. You remain the life insured, but the third party becomes the policyowner, responsible for the payment of all future premiums and entitled to any future claims paid by the insurance company i.e. the policy actually remains in force. The price you can get for your policy in the traded market is often better than the surrender (cash) value that your insurance company is prepared to offer.

Uh, wait, you sell your policy to somebody else, who benefits when you die?

Are there not, er, obvious problems to this idea?

In life insurance insurable interst only has to exist when the policy is issued. After that the owner of the policy (usually the insured, but may be someone else) may sell or asign all or part of their ownership of said policy.
One real world example:
Husband has life policy. Divorce occurs. Ownership of policy on husband’s life is given to ex-wife as part of settlement.

Viatical settlements. These became promionent in the US in the mid 1990s with the huge push to buy up life insurance policies of people with AIDS. The ads for viatical companies have decreased in the gay press with the development of the HIV “cocktail” but apparently they’re still big enough business to keep at least some of the companies afloat.

My understanding is that even if the cash value of a policy exceeds the face value, the beneficiary would receive the face value on top of the cash value. So unless the premiums are really burdensome, you might want to keep it.

Of course, you have to measure this meager growth verses what you could do by paying term premiums and investing the rest of the cash out value.

Personally, I think that I’d do a better job investing my money in a way to make the most money for my situation than what the insurance company would do.

-lv