How to Cash Out a Life Insurance Policy

Cashing out a life insurance policy is not something that should be done without a very good reason, such as a financial crisis that cannot be resolved any other way.  While processes vary, most insurance providers follow the same general steps for applying for the cash out, and how the funds can be disbursed.

1. Determine what provisions are in the life insurance policy for cashing out.  Most life policies that build some sort of cash value over time, such as a whole life plan, will include specifics of how long the plan must be in force before a cash out is possible, and usually an outline of how the amount of the cash-out is calculated.  Checking this information first will help you determine if it is even possible at this point to request a cash out. 


2. Talk with your life insurance agent.  One you have determined that you are eligible for a cash out, talk with your agent about how to proceed.  This will normally involve discussions of any alternatives, such as arranging a loan using the cash value of the policy.  If the alternatives are not feasible for some reason, your agent can provide assistance in determining the exact amount of the cash out, a figure that is known as the cash surrender value. 


3. Look into the tax liability.  Depending on local, state and national tax laws that apply, there is a chance you may owe taxes on any funds you realize from the settlement of the life insurance policy.  Consider the amount of those taxes before doing anything, since the tax obligation could be significant and effectively undermine any benefit you would receive from cashing in the policy. 


4. Gather quotes from several different cash settlement providers.  The providers essentially take over your life insurance plan and provide you with a cash settlement based on the current cash surrender value of the policy and any opportunity for additional growth on the balance of the plan after you have basically sold the policy to the settlement company.   Your goal is to get the best possible settlement while still working with a company that is reputable and ethical in the way they deal with clients. 


5. Take one last look for alternatives before signing anything.  Once the settlement is made, there is no chance to undo the process.  Before going this route to deal with a financial crisis, explore all other options and determine if there is any way to avoid this action.  Finding an alternative solution would mean leaving a valuable asset in place that could be worth a great deal more in the years to come and provide a greater benefit to your loved ones.