During periods of difficult times, most people tap into their life insurance as a means of having easy access to cash. Unfortunately, these individuals are not aware of the full implications of their actions. Hopefully, at the end of this article, you should know the entire truth about cashing in your life insurance policy.
It reduces your death benefits
Withdrawing cash from your life insurance plan reduces the amount in your cash value. This action consequently reduces your death benefit. So in the event of your death, your loved ones will receive a much lesser death benefit than you intended them to have. And this reduced life insurance proceeds might be insufficient to meet the financial needs of your family.
It could increase your premiums
Another outcome of cashing in your life insurance is the increased premiums you will have to pay. You already know that a withdrawal from your life insurance policy reduces both your cash value and death benefits. However, if you decide to avoid a reduction in your death benefits, your life insurance company will simply increase your premiums to cover the cost.
It might be taxed
If you are cashing in your life insurance plan, get ready to pay tax on the amount you withdraw. Usually, if this withdrawal happens within the first 10-15 years of your life insurance policy, you will be required to pay tax on some or all of the money withdrawn. In addition, if your life insurance plan is classified as a Modified Endowment Contract (MEC), your withdrawals will be subjected to both income tax and a 10% withdrawal penalty.