Whole life insurance comes with a cash value that’s not only suitable for securing one’s assets. The cash value of a whole life insurance policy is useful for much more than that, allowing policyholders to take out loans and pay their premiums, all while enjoying a much lower tax rate than they could find otherwise.
Though drawing cash value out of a policy comes with certain advantages, there are also key disadvantages to be aware of.
When an individual choose a whole life insurance policy, they are required to pay premiums over time. These premiums not only secure their death benefit, but they also build up over time to a cash value that policyholders can access via withdrawal, policy loan, or surrender (either partial or whole) of the policy.
While this cash value is perfect for times of financial stress, it’s best to consider all consequences before deciding.
Withdrawing cash value from an insurance policy is actually quite simple. The amount policyholders have available to withdraw depends on the total paid toward the policy and the type of initial agreement decided with the insurance company.
A lot of policyholders choose this option and use their cash value for financial stress or to make an investment with their business. It’s a great option because it’s not taxable as long as it doesn’t exceed the policy basis, though there are some things to consider beforehand.
Perhaps the most important thing to consider is the fact that, when withdrawing cash, the death benefit is reduced. That could mean less money for beneficiaries and for handling all costs that come with securing life’s assets.
A lot of policyholders use their cash value because it’s tax-free, though it is only so up to an extent. Any amount that is withdrawn over the cash value is subject to taxes, something that all policyholders should consider.
In the event of a withdraw, the total cash surrender value decreases, which causes the premium to increase to restore the death benefit. That means that you may be paying in more than you bargained for in the long run.
Instead of withdrawing funds, policyholders also have the choice to take out a loan using their cash value as collateral. There is no financial qualification for this loan, and it’s only subject to a limited amount of interest.
There are plenty of plusses about taking a loan from the cash value, including the fact that they are tax-free and there is no need to make payments until the policyholder chooses to.
On the other hand, there are a few things to keep in mind, as a policy load isn’t without its disadvantages as well.
Again, the biggest downside when taking out a loan is the reduced death benefit. However, with a loan, there is more than one way that the total is reduced. One is the loan amount and the other is the accrued interest. If these payments are not made to the point that the policy lapses, policyholders may lose their surrender cash value and more.
Policyholders not only have the option to withdraw from their cash value or take out a loan, but they also have the option to surrender their entire policy. Surrendering or canceling whole life insurance does give policyholders access to all of their cash, though the amount depends on how long they’ve had the policy.
Surrendering too early could result in a very low payout, as policyholders are subject to penalties and fees. Once they have paid on the policy for 10 or more years, they will pay fewer taxes and therefore be able to surrender without having to pay as many fees. The amount they receive will depend on how much they have paid in and how much their original policy was.
A final option that policyholders have is to choose a life settlement instead. This settlement is between the policyholder and either an individual or a life settlement company. In either case, they will purchase the life insurance policy in exchange for a cash settlement, taking over and paying premiums.
Most types of insurance are available for sale, no matter what the cash value is. There are some requirements that the holder of the policy has to abide by, including a death benefit of at least $100,000 and being at least age 65.
A lot of policyholders choose this option for a few reasons, including that they can get more out of it than surrendering. The value tends to be higher, giving them a greater return in the long run. On the other side of things, life settlements are typically taxed, with the amount treated as ordinary income. Additionally, policyholders should be aware that:
Though accessing your cash value during tough economic times is an option to relieve financial stress, it isn’t without its drawbacks. Consider all of the good and the bad before deciding to take advantage of your cash value. There are taxes, decreased death benefits, interest, and more to think about before accessing your cash value.
We recommend working with an insurance and investment professional, one like Sim. Sim has a unique set of skills, understanding not only life insurance but life investments.
Using her knowledge, she can point policyholders in the right direction and offer them insight about which options might be the best for them. It can get complicated to navigate alone, which is why it helps to take tips from the pros and choose the best option that will give you the best return.
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