What are the Different Options to Draw The Cash Value From the Whole Life Policy?

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.

 

What Is Life Insurance Cash Value?

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:

  • Variable universal life insurance — You receive all the features found in universal and variable types with variable universal life insurance. As your insurance needs change, you can choose to increase the death benefit. Alongside this, it allows you to invest in various places while considering your penchant for risk. Your premiums are also adjustable, allowing your cash value to cover the costs from time to time.
  • Universal life insurance — Universal life insurance is lifelong protection that enables you to build your wealth through investments. You decide where to invest your money, and it accumulates tax-free. Accessing the money is rather simple, and you can, of course, choose who to leave your cash to when you pass. Just bear in mind that you can’t withdraw money if doing so wouldn’t leave enough to cover the insurance costs. Plus, withdrawals decrease your policy’s cash value and, thus, the money you leave to your family. Regardless, it’s praised for its affordable and flexible characteristics.
  • Whole life insurance — Whole life insurance provides you with cover for your whole life at a set premium. In other words, the amount you pay monthly never changes. You never need to re-qualify, so regardless of health conditions, you know you’re covered. It’s one of the most popular options in Canada, especially for those who seek the cash value element. Not to mention that you can often choose from a bunch of insurance riders to ensure your policy meets your particular needs and problems.
  • Indexed universal life insurance — With this life insurance policy, you get a cash value and a death benefit. Unlike other types of permanent insurance with this feature, the growth depends on the insurer’s chosen stock market index. Therefore, your cash value won’t increase in fixed amounts. But most indexed universal life insurers provide an interest rate guarantee. If you’re looking to build wealth while covering your life, this kind of permanent insurance is typically worth it. But to ensure you make the right decision, it’s worth speaking to the dedicated professionals at Sim Gakhar.

 

How Does The Cash Value Component of Life Insurance Work?

When you purchase one of the policies above, you obtain these main features:

  • Death benefit — The payout given to your beneficiaries when you die. It’s essentially the amount of life insurance cover you buy.
  • Cash value — The component that could increase the worth of your policy because you can potentially use the money while living.

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.

 

The Options to Withdraw Cash Value From Your Life Insurance

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:

 

#1 Taking Out a Policy Loan

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.

 

#2 Using Cash Value to Pay Insurance Premiums

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).

 

#3 Making Tax-Free Withdrawals from Your Cash Value

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.

 

#4 Surrendering Your Insurance Policy for Your Cash Value

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.

 

#5 Using It as Line of Credit Collateral

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.

 

Discuss Your Cash Value Withdrawal Options with Sim Gakhar

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.

 

FAQs & Helpful Resources Regarding Whole Life Insurance