Should I Cash Out My Whole Life or Universal Life Insurance Policy?

Should I cash out my life insurance policy?

This question is usually asked about permanent life insurance policies that build up cash value over time, like Universal Life, Variable Universal Life and Whole Life insurance products.

First and foremost, these policies should only be kept based on your insurance need. Insurance salesmen like to highlight many of the policy’s other features such as the policy’s investment potential, ability to take our loans on the policy, or its cash value. But don’t get caught up in all that, these are not good accounts if your primary concern is long term savings.

For most, these should be used only for those that have a need for permanent life insurance, not for a savings or retirement account.
If you have no need for life insurance, it may be worth cashing out the policy.

Even if you do have insurance need, you should compare your current policy to lower price alternatives such as term insurance. We find a lot of our clients are much better suited with term insurance and investing in Roth IRAs, or even taxable brokerage accounts, compared to some of these insurance policies.

A couple things to be aware of before you cash out your policy:

First, Cashing out your insurance may have tax impacts. Make sure you understand your tax liability before cashing in the policy.

Next, you may also have the ability to exchange your current policy for another insurance policy. This is known as a 1035 exchange, which can be done tax free and get you in a better policy more suited to your needs.

Ultimately, determining the best course of actions with these policies is difficult because they have not only become part of your estate and insurance plans, but also your retirement and savings plan as well. Determining the best course of action requires a look at nearly every single aspect of your financial plan.

As Fee only and fiduciary financial advisors, we help our clients analyze their need for insurance and determine their options with these policies. We strongly recommend getting advice on these policies from someone who will look at your financial plan holistically, and who will not receive a commission based on your decision.