To withdraw the cash value from your whole life insurance policy, you can either take out a loan, surrender your policy, buy premiums, use it as collateral or get the money. The certain methods available to you depend on the type of permanent life insurance you purchased.
The rest of this article will help answer all your cash value questions and detail the five withdrawal options.
Cash value is a component of several life insurance policy types. It’s effectively a savings pot that you can use as a “living benefit” if necessary.
As you can probably imagine, policies with a cash value element are more expensive than those without. However, you receive many advantages for the extra premium, including borrowing from the pot when an emergency strikes.
It’s only available with varieties of permanent life insurance, including the below:
When you purchase one of the policies above, you obtain these main features:
A cash value insurance policy places a fraction of your premium payments toward the insurance, and the rest goes into your cash value pot. Over time, the latter accumulates tax-deferred interest. The mechanisms accruing your cash value depend on the specific type of insurance you choose.
Not only do the reasons behind the growing cash value change based on the policy type, but so do the withdrawal options.
You can access the cash value money in five ways:
A policy loan comes from your insurance provider and allows you to access a portion of your cash value. However, insurers usually charge interest on these loans, so it’s important to consider whether a withdrawal is worth it. With that said, the cash value remaining still accrues value while you’re repaying the loan.
If you haven’t paid off the loan balance by the time you die, your insurer deducts the owed amount from your death benefit.
Sometimes, money is too tight. In such circumstances, you can use your cash value to help supplement your monthly insurance premium. Not all policies allow this to happen, so it’s always worth checking with your insurer beforehand.
Keep in mind that using your entire cash value may cause your cover to lapse (i.e., you won’t be protected any longer).
Certain policies let you withdraw straight from the cash value portion. In doing so, you deplete the total cash value, thus lowering your death benefit and affecting future growth.
If you take out more than the adjusted cost basis stated in your policy, it will fall under taxable income.
Surrendering your policy basically cancels it since you won’t be covered afterward. However, you receive the cash value minus any unpaid premiums, loan funds, or surrender fees upon surrender.
You can use your cash value as collateral to secure a third-party line of credit. There is a fair amount of risk here as you’re pledging the policy for the loan, and any amount still owed after your death is taken from your insurance.
Knowing you have cash value is comforting, especially during rocky patches. However, everybody’s situation is different, and the minute details behind accessing the cash value are relatively convoluted; we recommend booking a consultation with Sim Gakhar. We’ll help you make the right cash value withdrawal decisions.
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