Life Insurance

It usually takes a few years until the cash value in a policy grows to a usable sum, but once that happens, you’ll have a financial asset that provides many advantages you can use while you’re still alive. Unfortunately, many people never maximize their cash value benefit because they don’t know how. There are four methods for accessing the cash value in a universal or whole-life policy:

Surrender: 

One option is to cancel the policy entirely and take the surrender value cash payment. However, with this option, you will no longer have life insurance coverage, and the cash you receive will be lowered by any fees taken out. Surrender fees can be significant, especially with a newer policy. Surrendering a policy before retirement age should be considered a last resort, especially if you don’t have other life insurance in place (in that case, think about getting a term life insurance quote before signing the paperwork). If you want to surrender your permanent life policy because of the premium cost, consider using the cash value to cover your premium payments (#4, below).

Withdrawal:

In many situations, you can take a cash withdrawal from your permanent life policy, and that money is often not subject to income taxes as long as it’s not more than the amount you’ve paid into the policy. However, there are potential disadvantages: your death benefit will likely be reduced, depending on the value of your cash account, and that reduction may be greater than the amount withdrawn, depending on the specific terms of your policy. Talk to your agent or life insurance company to find out how withdrawing money from your specific policy works. 

Loans: 

You can typically borrow money through your policy, although the amount varies. The money does not actually come from your policy but rather from the insurer who then uses your policy as collateral. Life insurance loans include interest payments, but it’s typically a lower rate than you’d get with personal loans or even a home equity loan. There’s no loan application or credit check, and credit rating does not impact your interest rate. You can choose not to repay, but the outstanding loan balance will typically be deducted from your death benefit. A policy loan can be a helpful option if you momentarily need cash but want to keep the full death benefit in force by repaying the loan amount.

Use cash value to pay your life insurance premium.

You can typically use the money in your cash value to pay part or all of your policy premiums, making it easier to keep your coverage in place. This is a popular option for older policyholders who want to use retirement income for living expenses but still want to keep life insurance coverage in place. 

After a time, the cash accumulations in a policy can grow larger than the “face value” or death benefit. If you’ve accumulated cash value that you do not intend to use in other ways, the cash value can increase the amount of death benefit to your beneficiaries instead.

Thinking about getting a universal life or whole life insurance policy to protect your family and help build your financial future? You should talk things over with someone who can help you decide exactly which type of policy is right for you. A lot will depend on your age, financial situation, family status, and other factors. If you don’t have a financial professional to discuss insurance with, Guardian can help you learn more about buying life insurance or even find a nearby financial professional who will listen to your needs and help guide you to a solution.