Reasons for cashing out

Over the two decades that we’ve been providing exit solutions to policyholders, we’ve seen some common scenarios in which people use the cash value of their policy to meet a financial need.

To supplement retirement income

For those wanting to supplement Government superannuation, cashing out a life insurance policy (either partially or fully) can provide access to funds to use now. Almost one in four policyholders seeking a payout from us have cited “creating more income” as the reason for selling their policy.

To clear your mortgage

Heading into retirement, the focus for many is to become mortgage free. A policyholder may no longer require life cover, so cashing out a life policy to clear the last portion of a mortgage provides peace of mind, especially as income inevitably drops in retirement.

why people cash in life insurance

“We wanted to supplement our superannuation”

Over the two decades that we’ve been providing exit solutions to policyholders, we’ve seen some common scenarios in which people use the cash value of their policy to meet a financial need.

To supplement retirement income

For those wanting to supplement Government superannuation, cashing out a life insurance policy (either partially or fully) can provide access to funds to use now. Almost one in four policyholders who have come to us seeking a payout have cited “creating more income” as the reason for selling their policy.

When there’s a requirement for cash

Some people sell their policy to help meet an upcoming financial commitment – clearing debt, helping out family, renovating the bach or even purchasing a property overseas. Whatever the reason, these policies are often the only source of new funds available to meet these needs; any additional amount you can source is very well received.

To settle accumulating policy debts

Policy debts sometimes accrue from loans taken out against the policy with the life company, or from not paying premiums over several years. The principal and interest can grow until you’re unable to repay the amount owed.

Recently we purchased a Whole of Life policy with a gross surrender value of $59K but with $45K debts attaching. Unable to visualise how he could repay the growing debt the policyholder had ceased paying the policy premiums and initiated surrender, rather than waiting for the policy to lapse and become worthless in 3-4 years’ time.

Policy Exchange provided a better outcome – we settled the debts direct with the insurance company prior to purchasing his policy for a 5-figure amount. The process, from first contact to payout, took two weeks.

Asset Rich, Cash Poor

For many in retirement who are asset rich but cash poor, gradually selling down an asset is a way to supplement income. Utilising the value of the dwelling via a Reverse Mortgage is one option. However, for those daunted at the prospect of raising a new mortgage against the family home, the Policy Exchange Regular Cashflow offers an alternative, using instead the built-up value of an existing whole of life or endowment policy. Whether it’s a lump sum payout for a well-earned holiday, or a regular cashflow to help with living costs, access to funds without the ties of a mortgage is appealing to many.

To pay down debt

When you’re paying more interest on debt than you’re earning on your investment, it might make sense to clear that debt. Almost half of the payouts we’ve made in recent years (47%) have been to people wanting to clear their mortgage or pay down other debt.

To put the money to use elsewhere

We’re sure you’re aware of the gains in property prices in recent years, so it’s not surprising some of our clients tell us they sold a policy to invest in property, or to ‘reinvest elsewhere’. Recently we helped a policyholder going through a marital split; she sold her policy for a deposit on a house to start afresh. Another policyholder cashed in one of his policies to help fund a grandchild into their first home.

When you’ve outgrown your policy, or no longer need insurance

Almost half (49%) of the policies we’ve traded in the past 5 years were taken out a couple of decades prior, when the policyholder was in their 20s or 30s – most likely when they took on a mortgage and began having children. Now those children have grown up and have their own life insurance policies, the parents’ insurance is no longer a necessity. Whilst the policy may still have some residual insurance value, we often hear the comment “The house is paid off, the kids have left home, so we no longer need insurance cover. We’ve put the money to use elsewhere”.

Carefully evaluate your options

Whatever your reasons for accessing cash from your policy, you have several options available via Policy Exchange and the life company. If you’re unclear which option best suits your needs, we recommend you contact your financial adviser who can help determine your best course of action.

Have more questions? See our answers to Frequently Asked Questions.