Drawing funds from the cash value portion of your whole life insurance policy requires four steps.
This article will break down everything you need to know about drawing funds from your whole life policy, as well as what you should consider before doing so.
For someone new to life insurance policies, withdrawing funds may sound like taking money out of the death benefit or your premium payments – this is not the case.
When someone talks about “cashing out”, “cashing in on”, or “drawing from” their whole life insurance policy, they are referring to money directly from the cash value component of the policy. Whole life policyholders cannot withdraw from paid premiums of their death benefit.
Whole life insurance policies take a portion of each monthly payment and put it towards cash value. This whole life cash value accumulates over time and is tax-deferred. It is not paid out to beneficiaries upon the policyholder´s death.
The longer you´ve had your policy, the more money has accumulated in your cash value. Options for drawing from your cash value of a whole life policy depend on your insurance provider and how long you´ve held your policy. The longer you´ve had your policy, the more you´ve accumulated, and the more options you´re given for drawing your funds.
Some withdrawals continue your policy without affecting your death benefit. Others, on the other hand, could lower or deplete your death benefit altogether. It´s crucial to understand the effects of your chosen withdrawal method before initiating the withdrawal.
Whole life insurance premiums are determined at the start of the policy, determining the monthly fixed premium payments which last for the duration of the policyholder´s life.
Some insurance providers allow policyholders to draw from their whole life cash value to pay their premium payments. This means that instead of paying your premium out of pocket as you have been, the money is simply deducted from the cash value fund.
In order to suggest this payment shift, you should contact an insurance agent like Sim Gakhar to initiate the request with your insurance company.
Almost all whole life insurance policies allow policyholders to borrow against the cash value of their policy. This means that if Bob has a cash value account valued at $10,000, he could take out a loan with his policy below that amount.
These loans typically have lower interest rates than that of competing banks and loan agencies, so they may be a good option for someone looking to pay for education, a car or car repair, or another unexpected or expensive bill.
These loans should be paid back, but if the policyholder decides not to repay the loan, all owed amounts plus interest will be deducted from the death benefit.
Let´s go back to Bob. If he takes an $8,000 loan out from his whole life policy that includes a $50,000 death benefit, his death benefit is reduced to $42,000 minus interest until he repays the loan.
Each whole life insurance has a maximum loan amount, depending on a few different factors. Give insurance agent Sim Gakhar a call to see which policy loan you may qualify for today.
Withdrawing from your cash value outright is usually possible within limits. Each insurance provider has its own stipulations – feel free to ask insurance professional Sim Gakhar about the limits on your whole life policy.
When withdrawing from your cash value, take note of how much you have paid towards your premium thus far. Typically, you can withdraw up to that amount from your cash value so long as 1) Your cash value has the amount available and 2) You meet your provider´s requirements for withdrawal. This amount is usually withdrawn tax-free, but any amount higher than your total payments will be taxed.
It´s important to know that the amount that you withdraw will be deducted from your death benefit. Some companies will even deduct more than you´ve withdrawn as a penalty.
Surrendering your whole life insurance policy means that you have decided to terminate your coverage. Your beneficiaries will no longer receive the death benefit nor any other benefits from the insurance company when you die.
When you surrender your policy, you are entitled to all or a portion of your cash value; however, this cash may be taxed.
If you´re looking to get cash for an emergency or to utilize your cash value while your policy is in effect, insurance professionals recommend policy loans, withdrawals, and drawing funds for payments before you consider surrendering your whole life policy.
Each method for drawing funds from your whole life policy has a set of consequences. These range from lowering the death benefit to paying back a new loan to losing all coverage entirely.
When choosing to draw funds from your whole life policy, consider the following questions.
Other things to consider when contemplating withdrawal consequences include your ability to get new life insurance coverage should this policy terminate, your health, your family´s financial stability, and your future.
Whether you´ve decided to draw funds or are still deciding, it´s now time to call investments and insurance agent Sim Gakhar. Sim will sit down with you in person or over the phone to go over your current whole life policy, financial needs, and withdrawal methods. You will be able to set clear expectations of your chosen withdrawal strategy to face the future without any surprises.
Sim Gakhar has years of experience helping her clients make the best financial decisions for themselves, their families, and their futures. Give her a call today to work towards a better tomorrow.
When it comes to life insurance there really is no time that is too soon to get covered. And, this is because the younger you are, the cheaper those premiums are going to be. Not only this, but you are probably healthy right now.
If you wait until something bad happens, you will not only without a doubt face higher premiums, but you might not even be able to get covered at all.
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