When you don't need your cash value life insurance policy anymore, you have a few options to get rid of the contract. Even though you might not need the death benefit, you may still want the cash value portion of the policy. Unfortunately, there is no way to roll the policy over directly into an Individual Retirement Account, but you do have other options.
Life Insurance to Annuity
You may roll your policy over to an annuity contract. An annuity is an insurance policy that acts like a long-term savings contract. These contracts might guarantee your principal plus an interest earning (in the case of a fixed annuity) or they may offer you the potential for higher investment earnings through mutual fund investments. No one guarantees gains from mutual fund investments, which may lose value over time. You pay tax on investment when they are withdrawn. If you take withdrawals before age 59 1/2, you will be assessed a penalty of 10 percent by the Internal Revenue Service, since these types of policies are treated the same as a non-qualified retirement account.
Life Insurance to Life Insurance
Even if you don't need a life insurance death benefit, you might consider keeping a policy. You may roll the cash value of your current policy into a paid-up life insurance policy. A single-premium life insurance policy is a policy that only accepts one premium payment. After you make that premium payment , no further premiums are required. The policy generates cash value immediate, and this cash value may grow over time, according to the terms of the contract. The policy will function similar to an annuity policy when making withdrawals or policy loans, which means that all investment gains are taxed upon withdrawal. Like annuities, single-pay life contracts cannot be drawn on before age 59 1/2 without a 10 percent penalty.
Surrender
You may surrender your policy for its cash value. You must contact the insurance company and inform them of your decision to surrender the policy. When you do, and you receive the cash value of the policy, you must pay tax on all of the gains in the policy. The gains are represented by any amount of money in excess of the total premiums you've paid into the policy. You can then use this money to fund an IRA if you wish.
Policy Loan
You may take out a loan against the policy. A policy loan is a loan against the cash value, which doesn't need to be repaid. You can use a policy loans to fund an IRA. The policy loan option provides a great deal of flexibility because you don't pay tax on any policy loan as long as the policy remains in force. This allows you to fund an IRA over time with money that is untaxed.
