Why would I Cash in my Life Insurance?

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, selling a life insurance policy 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.

why people cash in life insurance

“Empty nesters, we sold our policies and paid off the mortgage”

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, selling a life insurance policy 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.

Instead of a Reverse Mortgage

For people in retirement who are asset rich and cash poor, Reverse Mortgages are sometimes used to supplement income in retirement using equity built up in the family home. Many of these retirees may also be holding old-style bonus-backed life insurance policies, and may not be aware they could also access the cash value of these policies, as an alternative to a Reverse Mortgage. Cashing in a life policy is a simple one-off transaction, there are no upfront or ongoing costs, and over the long term it’s likely to offer a better way of preserving overall net wealth – see example in attached article. For those wishing to explore cashing in a policy, the Policy Exchange service helps ascertain whether the potential cash payout is the best possible.

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.

 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 clear your mortgage

When heading into retirement the focus for many turns to how to reduce debt. Often people purchased their bundled policies for two reasons: life cover and a savings programme. Once the children have left home the life cover may no longer be required, and the savings component of the policy comes into play. Selling and using the cash proceeds can enable retiring with a substantially reduced mortgage, or no mortgage at all.

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

If you no longer have dependents at home, and you’re mortgage-free, do you still need that life 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”.

 

To clear your mortgage

When heading into retirement the focus for many turns to how to reduce debt. Often people purchased their bundled policies for two reasons: life cover and a savings programme. Once the children have left home the life cover may no longer be required, and the savings component of the policy comes into play. Selling and using the cash proceeds can enable retiring with a substantially reduced mortgage, or no mortgage at all.

To settle policy debts, which you can’t repay

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 debt 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.

 

 

To settle policy debts, which you can’t repay

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 debt 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.

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.

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.

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

If you no longer have dependents at home, and you’re mortgage-free, do you still need that life 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”.

Anyone can sell

Some assume that selling a life insurance policy only applies to older policyholders looking to cash in. But in fact one-quarter of our clients are under 60 years of age. However it is important to note not all policies will qualify for an enhanced payout – find out quickly if yours does here.

 

Carefully evaluate your options

In New Zealand, a significant number of insurance policies are surrendered to the life insurance company every year. Many of these people don’t realise they may have been able to sell their policy instead, for more than the surrender value – even when there are debts against the policy.

Want to find out how much you’d receive? Get a FREE QUOTE here.  It’s quick and there’s no obligation to proceed.

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