Let’s examine what you should do when cashing in old life insurance policies. Frequently, people have old life insurance policies that require a review for purposes of the viability and an inquiry into the current “cash value” of the policy. Over the years our law firm has had many people who have come in with life insurance policies which are thirty, forty and even fifty years old. Before you can do an analysis, you must understand the difference between the two following descriptions of life insurance. For the purposes of this article, we discuss whole life insurance policies only.
Face Value. The “face value” is the overall death benefit, meaning the amount of insurance that will be paid to the beneficiary of the policy upon the death of the insured. For instance, if the insurance policy says (i.e., on its face) $50,000, then the face value of the policy is $50,000. When you die, there may be additional interest or dividends added to that amount, but it depends upon the policy.
Cash Value. The cash value is the amount that the insurance company will pay you right now if you requested to surrender the policy. In other words, the “cash value” is the amount the insurance policy is worth on the date of your inquiry to the company. If you elected to surrender the policy for cash value, you are forfeiting the death benefit, in return for cash now.
The issue arises when the difference between the cash value and face value are relatively small, which creates the need to conduct a risk-benefit analysis as to whether it is more prudent to surrender the policy now (i.e., take the cash value of the policy) or wait until the insured’s death for the face value.
For instance, if the face value of an older policy is $5,000, and the cash value of that same policy is $4,600, it may be worth “cashing in” on the policy, instead of waiting for the face value upon the death of the insured. Under this scenario, if the insured were to die today, the face value would pay out $5,000 (plus any accrued dividends and/or interest). On the other hand, if you “cash out” the policy, you would receive $4,600 now (or as soon as the insurance company distributes the cash value).
Nobody knows when we are going to die, but often the differential between the face value which will be paid at the time of death and the cash value is so small that it makes sense to simply liquidate the policy right now.
The first step in this analysis is to contact your insurance company and find out what the cash value is and what the face value plus accrued interest would be at the time of death. If, for instance, the difference is small, and the insured is in very good medical condition, you may want to cash the policy in right now. Obviously, if the insured on the life insurance policy is, for example, dying of cancer, you would not want to cash in the policy, but instead wait until after death for the face value.
Like many things in life, this is a risk-benefit analysis and there is no right answer because we do not know when we will die. The point being, you should review your cash value versus face value and determine if it may make sense to cash in the policy early.