During a financial storm, there are four ways to tap the cash value of your life insurance to help you stay afloat.
Your life insurance policy may not be on your mind when you are in dire financial straits. Although you bought the policy to provide for your loved ones after you pass away, you are still looking for ways to pay your bills.
A permanent life insurance policy such as whole-life might be able to provide emergency cash in certain cases. You could be subject to a higher tax burden and leave your family without funds in the event of your death. If you are in financial trouble, tapping the cash value on a whole-life insurance policy might be an option.
Is your life insurance worth cash?
Some life insurance policies do not have funds. You can’t get cash out of life insurance policies that aren’t permanent, like whole life. It must have had the time to grow cash value.
Term life insurance doesn’t qualify. It is the most affordable type, but it has the downside that term life is not permanent and does not have a cash value. This type of policy cannot be taken out.
Although permanent life insurance is more expensive than term life, a portion of the premium can be deposited into an investment account you might be able access. Whole life insurance, also sometimes called ordinary or straight life insurance, is the most common type of permanent policy. Cash value may also be available for other variations such as universal, variable, and indexed universal lives.
Your policy may not have much cash value if it is still young. Cash value can be compared to growing a savings account by making small deposits over time. In order to have enough cash value, you will need to pay premiums over several years.
Be aware that your policy’s cash value may be less than the premiums paid or the amount you purchased. Your whole life policy’s cash should grow unaffected until it reaches the death benefit. However, this may not occur until you turn 100.
There are four ways to get life insurance cash value
Cash value on your policy can be accessed for any purpose, but cash withdrawals from your life insurance policy are a serious option. There are many details that differ between policies, so make sure you read the contract and talk to your agent before taking any action. These are just a few options.
You can surrender the policy
You can choose to cancel your life insurance policy completely and get the surrender value. This is the cash value less any fees. This option will mean that you are no longer covered under the policy and that your family doesn’t receive a death benefit. You might have to pay a penalty depending on how long the policy has been in force. You could also owe income taxes if the payout exceeds the premiums paid. If you are certain that you don’t need the policy to provide for your family, surrendering it may not be wise.
Take a withdrawal
You can often withdraw part of the cash value from a whole-life policy without having to cancel the coverage. Instead, your heirs will be entitled to a lower death benefit upon your death. You won’t have to pay income tax on any withdrawals, provided you don’t exceed the premiums paid into the policy. You may also call this a partial cash surrender because you are giving up a portion of your coverage.
Borrow from the policy
You can borrow against cash value in many policies. Borrowing against life insurance may be easier than getting a loan elsewhere because there’s no credit check and a flexible timetable for repayment. You are expected to repay a life insurance loan with interest. If you die without paying the entire amount, the amount owed is taken from the benefit that will be paid to your heirs.
Cover your premium
Your cash value could be a valuable asset if you have to pay bills. Your whole-life policy may allow you to avoid paying out-of-pocket premiums. You can instead use your cash value to pay your premiums, protecting your policy while you are going through a financial storm.