Should You Sell A Life Insurance Policy That Has Cash Value?
The decision to sell a life insurance policy is usually a fairly straightforward proposition. That being said, issues can come up that require some thought and even a bit of math. One that is fairly common is whether it makes sense to sell a life insurance policy that has a cash value.
A life insurance policy is an investment tool at its core. As such, it carries an inherent value, one that can be used to turn it into saleable asset. Why would you sell such an investment? Liquidity. A life insurance policy is an illiquid asset for the most part. By selling it, you can raise a lump sum of cash for whatever expenditures you might face.
Some life insurance policies are not entirely illiquid. Policies like whole life often carry a cash value to them. This value can be tapped via loans by the owner of the policy. This makes them liquid to the extent that a loan can be taken. It also raises the question of whether it would be better to simply take a loan against the cash value of the policy instead of selling it. The answer is almost always no, but a bit of a comparison is needed.
The cash value found within a life insurance policy is usually a relatively paltry amount compared to the death benefit of the policy. The sale price of the policy is a percentage of the death benefit. In the vast majority of cases, the sale price will be significantly more than the loan that can be taken, which makes the sale of the policy the appropriate choice.
Let's consider an example. I have a one million dollar death benefit policy with a $100,000 cash value. I can take a loan for up to $50,000. Alternatively, I look into selling the policy and am offered 25 percent of the death benefit value. This puts the sales price at $250,000, which is significantly more than my $50,000 loan that has to be paid back.
Should you sell a life insurance policy that has cash value? You will have to compare the number, but it usually makes sense to go ahead with the sale.
A life insurance policy is an investment tool at its core. As such, it carries an inherent value, one that can be used to turn it into saleable asset. Why would you sell such an investment? Liquidity. A life insurance policy is an illiquid asset for the most part. By selling it, you can raise a lump sum of cash for whatever expenditures you might face.
Some life insurance policies are not entirely illiquid. Policies like whole life often carry a cash value to them. This value can be tapped via loans by the owner of the policy. This makes them liquid to the extent that a loan can be taken. It also raises the question of whether it would be better to simply take a loan against the cash value of the policy instead of selling it. The answer is almost always no, but a bit of a comparison is needed.
The cash value found within a life insurance policy is usually a relatively paltry amount compared to the death benefit of the policy. The sale price of the policy is a percentage of the death benefit. In the vast majority of cases, the sale price will be significantly more than the loan that can be taken, which makes the sale of the policy the appropriate choice.
Let's consider an example. I have a one million dollar death benefit policy with a $100,000 cash value. I can take a loan for up to $50,000. Alternatively, I look into selling the policy and am offered 25 percent of the death benefit value. This puts the sales price at $250,000, which is significantly more than my $50,000 loan that has to be paid back.
Should you sell a life insurance policy that has cash value? You will have to compare the number, but it usually makes sense to go ahead with the sale.
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