Maximizing Your Cash Value Life Insurance: Strategies For Success

Cash value life insurance is a type of permanent life insurance that features a cash value savings component. This means that the policyholder can use the cash value for several purposes, including borrowing or withdrawing cash from it, or using it to pay policy premiums. Permanent life insurance policies such as whole life, universal life, and variable life can accumulate cash value over time. This cash value can be accessed in multiple ways, depending on the type of policy. For instance, you can borrow against the cash value, make a withdrawal, or use it to pay premiums. However, it's important to carefully consider the costs, tax implications, and impact on your financial plan before accessing your cash value.

Borrowing against your cash value life insurance policy

How it Works

When you borrow against your cash value life insurance policy, you are taking out a loan from the insurance company, with the death benefit and cash value of your policy serving as collateral. This means that the loan amount is typically limited to a percentage of your policy's cash value, usually up to 90%. The interest rates on these loans tend to be lower than those on personal or bank loans, and there is no formal approval process or credit check required.

Pros

There are several advantages to borrowing against your cash value life insurance policy:

• No credit check: Since you are borrowing against your own policy, there is no need for a formal credit check.
• Low-interest rates: The interest rates on policy loans are generally lower than those of traditional loans.
• Flexible repayment: You can choose to repay the loan at your own pace without a set schedule.
• No impact on credit: Taking out a policy loan will not affect your credit score.

Cons

However, there are also some potential drawbacks and risks to consider:

• Reduced death benefit: If you don't repay the loan before the policyholder passes away, the loan amount and any accrued interest will be deducted from the death benefit paid to the beneficiary.
• Risk of lapse: If the loan amount and interest exceed the policy's cash value, the policy could lapse, and you may have to pay taxes on the borrowed amount.
• Loss of policy: If you are unable to make timely loan payments, you may lose your life insurance coverage.
• Higher costs: Permanent life insurance policies that offer cash value tend to have higher premiums than term life insurance policies.

When it Makes Sense

• Quick access to cash: It allows you to access funds quickly, without the minimum income requirements and hard credit checks typically associated with traditional loans.
• Alternative collateral: If you want to avoid using your assets, such as your home or car, as collateral, borrowing against your life insurance policy can be a good alternative.
• Flexible repayment: Life insurance policy loans often come with flexible repayment schedules, allowing you to pay back the loan at your own pace.

In conclusion, while borrowing against your cash value life insurance policy can provide quick access to funds, it's important to carefully consider the potential risks and ensure that you understand the terms and conditions of the loan to make an informed decision.

Withdrawing money from your cash value

Understanding the Process

• Contact Your Insurance Provider: Reach out to your insurance company to understand their specific process for withdrawing funds. They will guide you through the necessary steps and provide you with the required paperwork.
• Know the Limits: Familiarize yourself with the limits of your policy. There may be restrictions on how much you can withdraw, and it's important to understand these before initiating the process.
• Consider the Impact on Death Benefits: Withdrawing money from your cash value life insurance policy will likely result in a reduction in the death benefit. Be sure to carefully weigh this impact before proceeding.
• Tax Implications: Withdrawing more than the amount you've paid into the policy may result in taxable income. Consult with a financial advisor or tax professional to understand the specific tax implications for your situation.

Initiating the Withdrawal

• Complete the Necessary Paperwork: Your insurance provider will likely require you to fill out specific forms to initiate the withdrawal. Carefully review and complete all the necessary documentation.
• Provide Verification: You may be asked to verify your identity and provide additional information to process the withdrawal.
• Specify the Amount: Decide on the amount you wish to withdraw and ensure it falls within the limits of your policy.
• Receive the Funds: Once the withdrawal is approved, your insurance company will release the funds to you, typically through a wire transfer or by depositing the money into your bank account.

Remember, it's always a good idea to consult with a financial advisor or tax professional before making any significant decisions regarding your life insurance policy. They can help you understand the full implications of withdrawing funds and ensure you make the best decision for your financial situation.

Surrendering your policy for cash

Firstly, by surrendering your policy, you will lose your life insurance protection. This means that your beneficiaries will no longer receive a death benefit when you pass away. Secondly, you may have to pay fees and charges, which will reduce the amount of cash you receive. These fees are typically higher for newer policies and usually don't apply after 10 to 15 years. Surrender fees can be as high as 10% to 35% of your policy's cash value, but they decrease over time.

When you surrender your policy, you will receive a cash payment, known as the surrender value, which is the cash value minus any surrender charges and outstanding loans or premiums. This payment can be made as a lump sum or in periodic payments, depending on your policy. It's important to review your policy contract to understand the specific details of the surrender value and how it will be paid out.

If your surrender value is higher than the amount you've paid into the policy, you may owe income taxes on the earnings. Therefore, it's important to carefully consider the potential tax implications before surrendering your policy.

Before surrendering your policy, it's worth exploring alternative options for accessing your cash value. These include taking a partial withdrawal, borrowing against your cash value, or using the cash value to cover your insurance premiums. Contacting your insurer or a financial advisor can help you understand the different options available and make an informed decision.

Using cash value to pay premiums

Using the cash value of your life insurance policy to pay premiums can be a good way to reduce your monthly expenses, especially if you are retired. However, it is important to note that doing so will reduce the death benefit paid to your beneficiary.

The specifics of using your cash value to pay premiums depend on the type of policy you have. Variable and universal life insurance policies are often favoured because they allow you to use the policy's cash value to pay premiums. With these policies, you can maintain coverage for years at little to no additional cost if you have a fairly large cash value with consistent returns. However, you must carefully monitor the cash value to ensure it doesn't drop too far, or you may lose your coverage.

Whole life insurance policies typically don't let you pay premiums using the policy's cash value, except if you convert to a paid-up policy. Not all insurers offer this option, but with a paid-up life insurance policy, the cash value is large enough that you can stop paying premiums out of pocket. The downside to paid-up whole life insurance policies is that each premium payment is deducted from the policy's death benefit, and less cash value is available for other purposes, such as a policy loan.

Before using your cash value to pay premiums, be sure to check with your insurer to determine which cash value options are available to you, as well as any associated requirements and costs. Consulting a financial advisor can also help you understand the potential consequences of accessing your cash value.

Increasing your death benefit with paid-up additions

You can only purchase PUAs in participating whole life policies (those that pay dividends). However, they are one of many ways you can use your dividends—other ways include reducing your premium, adding to the cash value, and receiving a cash check.

Many life insurance companies also offer a paid-up additions (PUA) rider, which lets you pay extra premium dollars to purchase more PUAs than you could with dividends from the base policy alone. This can be a turbocharged way to increase the cash value and death benefit, especially since the value of paid-up additional life insurance compounds over time as it earns dividends, which can be used to purchase more paid-up insurance.

The paid-up additions feature is a powerful and efficient feature built into whole life permanent insurance that could be a worthy investment. It is a long-term strategy to maximize the cash value and death benefit.

Frequently asked questions