Using Life Insurance Money: When And How To Access Funds

Life insurance is an asset that can be used for long-term financial planning. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance is a cheaper option that provides a death benefit if the policyholder dies while the plan is in effect. Permanent life insurance, on the other hand, is more expensive but offers an investment component that allows policies to build cash value over time. This cash value can be accessed in several ways, such as taking out a loan, making withdrawals, or surrendering the policy. However, it's important to consider the pros and cons of each option, as they can impact the death benefit and the growth of the cash value account.

Borrowing against your life insurance policy

Firstly, it's important to note that you can only borrow against a permanent life insurance policy, such as a whole life insurance or universal life insurance policy. These policies are more expensive than term life insurance but have no predetermined expiration date. They also have a cash value component, which is where the money you borrow will come from. This cash value grows over time as you pay your premiums, and you can borrow against it as soon as there is enough built up to take out a loan in the amount you need. This can take several years, depending on the structure of your policy.

When you take out a loan against your policy, your insurer lends you the money and uses the cash in your policy as collateral. This means that the policy's cash value can continue to accumulate, but it's important to check with your insurance company how interest and any dividends will be determined and paid when you have an active loan.

There is no approval process or credit check for a policy loan, and you don't have to explain how you plan to use the money. The loan is also not recognised by the IRS as income, so it remains free from tax as long as the policy stays active. However, it's expected that you will pay the loan back with interest, and if you don't, it will reduce the death benefit that your beneficiaries will receive.

Policy loans can be useful financial tools, but they also come with risks. If you don't make interest payments, your policy could lapse and the entire loan amount could become taxable. Therefore, it's important to consider the pros and cons of a policy loan in the context of your situation before taking one out.

Withdrawing from your life insurance policy

• Withdraw the Funds: You can withdraw part of the cash value, just like from a bank account, to cover expenses. Withdrawals are generally tax-free if you don't exceed the amount you've paid into the policy. However, withdrawals may be taxed as income if you take out more than you've contributed. Withdrawals can also lead to reduced payouts for your beneficiaries and may be subject to partial surrender charges.
• Surrender Your Policy: You can cancel your coverage and take the surrender value of the policy. The surrender value is usually less than the cash value due to surrender fees, which tend to be higher if the policy is relatively new. Surrendering may result in a large sum of money, but it will leave your beneficiaries without a payout. Additionally, funds received above your contributions may be taxed.
• Apply Cash Value to Premiums: You can use the cash value of your policy to pay for part or all of your premiums, freeing up money for other expenses. However, this approach may limit the cash value available for other purposes, and the policy may lapse if all funds are used.
• Borrowing Against the Policy: You can borrow against your policy, using it as collateral. There are generally no credit checks, and interest rates are typically lower than those of other financial institutions. Repayment is flexible, but if the loan isn't repaid before your death, it will reduce the amount your beneficiaries receive.

Surrendering your life insurance policy

When you surrender a permanent life insurance policy, you will receive the cash surrender value of the policy, which is the cash value minus any surrender fees. Surrender fees are fees charged by the life insurance company for cancelling your insurance contract early. They can be high if you've only had the policy for a short time, but they generally decrease over time.

There are several reasons why you might want to surrender your life insurance policy:

• You can no longer afford the premiums
• You need a large amount of cash quickly
• You no longer need life insurance coverage (e.g. you have no dependents)
• You have found a better deal with a different policy

Before surrendering your policy, it's important to consider the potential downsides. Firstly, you may have to pay taxes on the cash surrender value if it is higher than the amount you paid in premiums. Secondly, your beneficiaries will not receive a death benefit if you pass away after surrendering the policy. Finally, you may be able to access the cash value of your policy without surrendering it, through a policy loan or withdrawal.

Using the cash value to pay your premium

Permanent life insurance policies, such as whole life and universal life, can accumulate cash value over time. This cash value can be used to pay your premium.

The cash value of a permanent life insurance policy grows over time as you pay your premiums. If your balance is large enough, you can use the cash value of your policy to pay for part or all of your premiums, freeing up space in your budget for other expenses. However, if you use all of your cash value to pay your premium, your policy may lapse.

It's important to note that using the cash value to pay your premium will reduce your monthly expenses but will also reduce your death benefit. Any amount taken from your cash value account and not repaid before your death will reduce the death benefit paid to your beneficiary.

Before using your cash value to pay your premium, be sure to check with your insurance provider to understand the rules, requirements, and potential costs associated with this option.

Applying for living benefits

Living benefits are benefits paid out to those who are terminally ill and have a documented medical prognosis showing a life expectancy of no more than nine months. To be eligible for living benefits, you must be enrolled in the FEGLI Program and be an employee, annuitant, or compensationer. Employees can choose a full or partial living benefit, while annuitants and compensationers can only elect a full living benefit.

If you are eligible, you must contact the Office of Federal Employees' Group Life Insurance (OFEGLI) at 1-800-633-4542 to obtain the form to elect Living Benefits (Form FE-8). This form is not available from your human resources office or the Office of Personnel Management (OPM).

Living benefit payments are equal to the Basic Life insurance amount, plus any extra benefit for persons under age 45, that would be in effect nine months after the date of OFEGLI receives a completed claim form. The payment is reduced by a nominal amount (4.9%) to make up for lost earnings to the Life Insurance Fund due to the early payment. It's important to note that the election of living benefits has no effect on the amount of any Optional life insurance, and you will continue to pay premiums for any Optional insurance you have.

Additionally, living benefits may be provided by optional accelerated benefits riders, which are supplemental benefits that can be added to a life insurance policy. These riders typically require additional premiums and may not be available in all states or on all products. It's important to consult a financial professional or tax advisor to understand the tax implications and eligibility requirements for receiving living benefits.

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