When is the best time to encash your life insurance policy?
If your policy is no longer affordable, it may be time to consider cashing it out
Dubai: Encashing a life insurance policy can be beneficial in certain situations. If your policy is no longer affordable or necessary, it may be time to consider cashing it out.
When to encash your insurance?
Life changes or financial hardships may prompt you to encash your life insurance policy. If your beneficiaries no longer need the payout, or if you need immediate funds, it may be a viable option.
“Encashing your policy can be beneficial if your financial situation changes significantly,” said Ian Bagley, an insurance analyst in Dubai. “However, it’s important to weigh the pros and cons before making a decision.”
Cash value in life insurance
Life insurance policies with a cash value component accumulate savings over time. This allows policyholders to withdraw or borrow against the cash value when needed. In retirement, this amount can supplement income.
Beyond the death benefit, some policies accumulate a cash value, which earns interest and can be accessed during your lifetime.
What to consider before encashing
Life insurance is often a long-term financial commitment. However, if your policy’s term is ending or you no longer need coverage, a ‘life settlement’ allows you to sell the policy for a cash payout.
“If a policy’s term is ending, encashing it helps recover part of your investment,” said Anil Pillai, a UAE-based consumer banking analyst. “The proceeds can be used for expenses like medical bills or debt repayment.”
However, withdrawing from the policy reduces the death benefit, which could impact beneficiaries.
How much is your policy worth?
The cash value of a policy is the accumulated savings minus surrender fees. The payout from an encashment will be lower than the death benefit, as buyers need to profit.
Alternatives to encashment
Before encashing, consider these options:
Withdraw or borrow against cash value: Access funds while keeping the policy active.
Use cash value to cover premiums: Maintain the policy without additional payments.
Reduce the death benefit: Lower premiums by reducing coverage.
Replace the policy: Switch to a more suitable plan.
“You can also surrender a policy, but encashing usually yields a better payout,” Bagley noted.
Bottom line
A life insurance policy should last as long as you have major financial responsibilities. If your beneficiaries depend on your income, keeping the policy is advisable.
“If you can’t afford premiums, encashing the policy can provide financial relief,” added Pillai. “A life settlement often results in a higher payout than surrendering the policy.”
Ultimately, the decision depends on your financial needs and the impact on beneficiaries.
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