With hard times comes a growing need for cash - cash that you may not have. Often, people in these situations look for means that are already within their reach to access the needed cash. And in today’s world, almost everyone has an insurance policy.

So, the real question is - how should you access the cash to your policy? Should you cash it in or take a loan against it?

We believe taking against your policy, whether by surrendering it or taking a loan against it, should never be your first resort. Imagine paying premiums all these years just to have some immediate cash at hand and forego all future benefits! Certainly, a hard thing to do.

But if you need to decide between cashing it or taking a loan, here’ something you should know:

Cashing your insurance: Is it worth it?

There are a couple of ways to cash in your insurance, none of them financially wise. You can either surrender your policy altogether for cash or carry out a life settlement. In both cases, you can receive cash in exchange for the policy, albeit with some unpleasant consequences.

How does surrendering your policy work?

Surrendering a policy is just that - cancelling it and surrendering it completely, in exchange for cash. Further, when you surrender a policy in its early stages, you may be liable to pay a surrender fee, which can notably reduce your cash value.

The surrender fee is dependent on the number of years the policy has been owned by you. There are also quick a few setbacks to surrendering your policy:

• You are liable to pay tax on the gain, and even more if you still have an outstanding balance on a loan against the policy.
• You have no more rights over the death benefits.
• The cash value can be significantly lower compared to the price you may receive in a life settlement.

What happens in a life settlement?

A life settlement includes selling off your policy over to someone for cash. Further, there are certain regulations as to the eligibility of the person carrying out a life settlement. Compared to surrendering your policy, you can get more money in exchange for a life settlement. However, there are certain setbacks to consider:

• The person buying the policy off of you will reap the death benefit.
• The new policy-holder will have the right to access your medical records and ask for your health updates.
• You will be liable to pay tax for the life settlement amount.
• You may not always receive a fair amount that your policy is really worth.
• The net fee that you receive can be significantly lower, with commissions and fees into the picture.

All in all, make sure you use cashing in your insurance as the last resort, considering the consequences of your choices.

Is taking a loan against your insurance wise?

Compared to surrendering your policy or cashing it in, you are always eligible to take a loan against your policy. This is issued using the cash-accumulation account as collateral and based on the terms of the contract.

One good thing about taking a loan from a policy that is non-MEC is that it won’t be taxed. And you certainly don’t have to make payments for the loan even if the balance that is outstanding gathers interest.

However, like every other option, taking a loan comes with setbacks too:

• Your beneficiary will receive a reduced death benefit.
• The cash value may be reduced if a loan remains unpaid and continues gathering interest.
• If the premiums are unpaid, the policy may lapse, making the borrowed amount taxable.

If you’re short on money and are considering between the two options, make sure to choose one that does not severely compromise your future benefits or goals.