You're cashing in a life insurance policy
There may come a time in your life when you no longer need a life insurance policy. Your children may have become financially independent. Perhaps paying the premiums is putting a strain on your finances. Or maybe you'd just like to use the money for something else.
You have some options when cashing in a life insurance policy. Each has different financial and tax implications, however, so it's important to know the outcomes before you take action.
You can surrender the policy for its cash value, for example, but you'll receive only a fraction of the policy's face value and you'll pay tax on any excess over your basis (generally, the premiums you've paid).
One potential alternative is to donate your policy to charity in exchange for a charitable gift annuity (CGA), which provides a lifetime income stream. Generally, here's how it works: The charity receives your policy now and takes over the premium payments. It also agrees to make fixed annuity payments for the rest of your life or for the combined lives of you and your spouse.
Typically, the annuity amount is based on the value of the gift and on suggested annuity rates published by the American Council on Gift Annuities (ACGA). You're entitled to an immediate charitable deduction equal to the amount by which your gift's value exceeds the present value of your expected annuity payments.
Other options to consider include making a tax-free partial surrender, taking a tax-free policy loan or trading the policy for an immediate annuity.
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