How to Use Cash Value of Whole Life Insurance

You can use the cash value of a whole life insurance policy by:

  • Increasing your death benefit
  • Covering your premium payments
  • Taking out a loan
  • Making a withdrawal
  • Boosting your retirement funds
  • Surrendering your policy

Each use of the cash value has its benefits and risks. Keep reading to learn why you need to use your cash value and to explore each of the listed uses.

 

What Happens to Cash Value if Whole Life Policy is Claimed

Whole life insurance policies are split into two parts: a cash value and a death benefit.

The death benefit is what is paid out to a beneficiary in the case of the death of the insured. This is a set amount, and it only changes if there are outstanding loans that need to be recouped by the insurer.

When the death benefit is claimed the remaining cash value defaults to the insurer. This means that any additional funds go to the insurance company instead of the beneficiary or others in the family.

This is not the most practical way to use a cash value, so it is important to find a way to utilize the cash value while the insured is still alive.

 

Ways to Use Cash Value of Whole Life Insurance Policy

Using the cash value of a whole life policy is an easy way to save and even earn money in the present, and it ensures that you get full use of your whole life policy. Uses range from trading the cash value for more death benefit to taking out loans and even surrendering the policy.

Most insurance brokers recommend you let the cash value sit for at least 10 to 15 years before you tap into it in any of these ways.

 

Increasing the Death Benefit

If you accumulate a cash value that you do not need or intend to use for yourself you can attempt to negotiate with your insurer to trade the cash value for an increased death benefit.

This is not guaranteed, and your success depends on how you negotiate, the age of your policy, and the insurer’s desire to keep you as a customer.

If you succeed, you will drain your cash value and transfer the full amount of it to your death benefit. This means that a policy is a $300,000 death benefit and a cash value of $150,000 would turn into a $450,000 death benefit with no cash value.

There are other implications to this, but it is a useful avenue if you have no other intention for the funds.

 

Covering Premium Payments

Certain whole life insurance contracts allow you to use your cash value to cover your premium payments, but you need to verify it first.

If your cash value is substantial enough, you can use the cash value and any interest earned to cover premiums, saving you thousands every year in premium payments.

 

Taking Out a Loan

Many choose to use the cash value of their whole life insurance policy as a pool to acquire loans from. Cash value loans are typically available at lower interest rates than other loans, and you do not have an obligation to pay them back.

The amount of the loan plus any interest accrued will be deducted from the death benefit, or you will be responsible for it if you surrender the policy.

You can also use the cash value of your policy as collateral for a loan at another institution if you are not interested in withdrawing funds and potentially reducing the death benefit.

 

Withdrawing from the Cash Value

Instead of taking out a loan from your cash value, you can withdraw a portion of it. Depending on how your policy is set up and the amount you withdraw, this might draw from the death benefit as well.

Some policies take a dollar-for-dollar amount when you withdraw from the cash value, meaning that you reduce the death benefit by the exact amount.

This method is trickier to navigate if you intend to keep the death benefit viable.

 

Boosting Retirement Funds

The cash value of a whole life policy is a popular source of extra retirement funds because it defers tax as premiums are paid, and you can use it as an asset in a retirement portfolio.

This is only beneficial if you acquire the policy with enough time to let the cash value grow for at least 10 to 15 years. If this is something you intend to do then it is essential you get with an agent to find a policy that works well for this scenario.

 

Complete Policy Surrender

If you no longer have a use for the policy and have no one you want to leave the death benefit to you can terminate the policy to receive the entirety of the cash surrender value. This is the value of the policy minus any surrender fees and outstanding loans.

Because this is irreversible, it is not a decision you should make lightly. Once you relinquish the policy it can be difficult to obtain another for the same premiums, and you are starting all over.

If you have heirs or dependents that could benefit from the death benefit, then pursuing other options first is preferred.

Surrendering the policy also makes the amount susceptible to taxation, and any outstanding loan balances can add on to those fees.

 

Growing the Cash Value

There is some potential to use the cash value to invest in other opportunities where you can gain wealth, but this is an in-depth strategy that requires more thought and planning.

Essentially, you withdraw from the cash value and invest it in an area that has a high return on investment, like real estate, and within a few years, you can pay back the loan and have a new source of income.

 

Final Thoughts

When it comes to choosing how you will use the cash value of your whole life insurance policy it is important to find an option that best suits your needs. Sim Gakhar has the experience and expertise to help you get the most of your policy. Contact Sim today for a head start on planning out your financial future.

 

FAQs & Helpful Resources Regarding Whole Life Insurance