How To Boost Your Life Insurance With Cash

Life insurance is a financial safety net that provides a death benefit to your beneficiaries after you pass away. However, it can also be used as a financial asset during your lifetime. While the primary purpose of life insurance is to offer financial protection to your loved ones, certain policies allow you to build cash value, providing access to funds while you are alive. This cash value component is typically associated with permanent life insurance policies, such as whole life and universal life insurance, rather than term life insurance.

Withdrawing or borrowing against the cash value of your life insurance policy can provide funds for various expenses, such as supplementing retirement income, funding a house remodel, or paying for education. However, it's important to carefully consider the potential consequences, as doing so will impact the amount available to you, your death benefit, and the growth of your account. Additionally, the cash value is usually not passed on to your beneficiaries, and any outstanding loans or withdrawals will reduce the death benefit paid to them.

When exploring life insurance as a financial asset, it's crucial to understand the different types of policies available, the accumulation of cash value, and the various ways to access and utilize those funds.

Permanent life insurance policies can be used as a financial asset, just like an IRA or mutual fund

Permanent life insurance policies can be used as a financial asset during your lifetime, just like an IRA or mutual fund. Permanent life insurance policies, such as whole life and universal life insurance, offer lifelong coverage and allow the policyholder to build a cash value over time. This cash value can be used to take out loans, make withdrawals, pay premiums, or even be surrendered for cash.

• Whole Life Insurance: This is the most common type of permanent life insurance. It offers a guaranteed death benefit that will never decrease as long as the premiums are paid. Premiums remain fixed, providing long-term stability. Whole life insurance policies also accumulate cash value, with a portion of the premium going into a cash value account. This cash value grows at a minimum guaranteed rate and can be accessed by the policyholder.
• Universal Life Insurance: Universal life insurance offers more flexibility than whole life. Policyholders can adjust their coverage and premiums within certain limits as their circumstances change. The cash value in universal life insurance grows based on market interest rates, providing the potential for higher returns but also carrying the risk of lower returns.
• Variable Universal Life Insurance: This type of policy allows policyholders to invest their cash value in sub-accounts similar to mutual funds, giving them more control over their investments. While this offers the potential for higher returns, it also comes with a higher risk of losing cash value.
• Tax Advantages: Permanent life insurance policies offer tax advantages. The cash value grows tax-deferred, and withdrawals or loans against the cash value may be tax-free up to a certain amount. Additionally, the death benefit is typically paid out income tax-free to beneficiaries.
• Loan and Withdrawal Options: Policyholders can borrow against the cash value of their permanent life insurance policy, using it as collateral for a loan. They can also make withdrawals from the policy, but it's important to note that loans and withdrawals will reduce the death benefit and available cash surrender value.
• Surrender and Sale Options: Policyholders can choose to surrender their policy and receive the cash surrender value, though this will result in the loss of life insurance coverage. Alternatively, they can sell their policy to a third party through a life settlement or viatical settlement, receiving a portion of the death benefit.

In summary, permanent life insurance policies, particularly whole life and universal life, can serve as valuable financial assets during the policyholder's lifetime. The ability to build cash value and access it through loans, withdrawals, or surrenders provides flexibility and can be advantageous for retirement planning, emergency funds, or supplementing income. However, it's important to carefully consider the potential consequences of accessing the cash value, as it can impact the death benefit and the overall growth of the policy.

You can borrow against the cash value of your permanent life insurance policy

Borrowing against the cash value of your permanent life insurance policy can be a quick and easy way to get cash in hand when you need it. However, it's important to remember that you can only borrow against a permanent life insurance policy, such as a whole life insurance or universal life insurance policy. Term life insurance, which is generally cheaper and more suitable for many people, does not have a cash value component.

How It Works

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 understand how interest and dividends will be determined and paid while you have an active loan. Policy loans do not affect your credit score and do not require a credit check since you are essentially borrowing from yourself.

Pros

Borrowing against your life insurance policy offers several advantages:

• No credit check or approval process is required.
• You can use the money for anything without justification.
• The loan is not recognised by the IRS as income and remains tax-free as long as the policy stays active.
• There is no mandatory monthly payment, and you can pay it back whenever you want.
• The cash value keeps growing, and your policy remains active as long as premiums are paid.

Cons

However, there are also some potential drawbacks to consider:

• Policy loans reduce the death benefit if not paid off. If you pass away before repaying the loan, it will reduce the amount your beneficiaries receive.
• Interest is added to the loan balance, and if left unpaid, it can cause the policy to lapse.
• Borrowing from your policy may deplete the cash required to ensure permanent insurance guarantees.
• You may end up paying more money as some policies will ensure the guarantee when you take out cash, but at a higher cost.
• It usually takes a few years for the cash value to build up sufficiently to take out a loan.
• Borrowing against your policy may slow down the growth of your cash value.
• The loan amount and any unpaid interest will be deducted from the death benefit, reducing what your beneficiaries receive.

The amount you can borrow depends on the cash value of your policy. In general, you can borrow up to 90% of its cash value, but some insurers may allow you to borrow more. It's important to check with your insurer to understand their specific rules and requirements.

Repayment

There is no mandatory repayment schedule for policy loans, and you can choose to pay back the loan whenever you want. However, it's important to make regular interest payments to avoid the loan amount and interest owed being deducted from the death benefit. If the loan balance exceeds the policy's cash value, your policy may lapse, and you could owe taxes on the borrowed amount.

You can use your life insurance policy as collateral for a loan

Collateral assignment of life insurance is a common requirement for business loans. It may also be a good option if you want to access funds without placing any of your assets, such as a car or house, at risk. It can also be a credible choice if your credit rating is not high, making it difficult to find attractive loan terms. Since your lender can rely on your policy's death benefit to pay off the loan if necessary, they are more likely to give you favourable terms despite a low credit score.

Here's how to apply for collateral assignment of life insurance:

• Know the requirements: Lenders generally require an active life insurance policy with cash value. This means that a term life insurance policy may not qualify. However, exact requirements vary by lender.
• Fill out a life insurance application: You will likely need life insurance with cash value. Check with the lender to see if the policy you're approved for qualifies for a life insurance collateral assignment before signing the contract.
• Fill out a collateral assignment form: Once you sign your life insurance contract and pay your first premium, complete a collateral assignment form with your insurer. You'll fill out your lender's contact details so your insurer can designate them as a collateral assignee while your loan is outstanding.
• Sign and submit the form: After completing the collateral assignment form, you and your lender must sign it. Your insurer may be able to provide electronic versions of the documents and e-signature capabilities to streamline the process.

Using your life insurance policy as collateral may impact your beneficiaries if you default on the loan or pass away with an outstanding balance. Either event could reduce the death benefit payout your beneficiaries receive.

You can withdraw funds from your life insurance policy

There are four main ways to withdraw funds from a permanent life insurance policy:

• Withdrawals: You can take a cash withdrawal from your policy, but this may be limited to the amount you have paid into the policy. Withdrawals are often not subject to income taxes if they do not exceed the amount you have paid into the policy. However, withdrawals will likely reduce your death benefit, and this reduction may be greater than the amount withdrawn, depending on the specific terms of your policy.
• Surrender: You can cancel your policy and take the surrender value in cash. However, this option means you will no longer have life insurance coverage, and the cash you receive will be lowered by any fees taken out.
• Loans: You can borrow money through your policy, with the insurer lending you the money and using your policy as collateral. Life insurance loans typically have lower interest rates than personal loans or home equity loans, and there is no loan application or credit check required. You can choose not to repay the loan, but the outstanding balance will typically be deducted from your death benefit.
• Premium payments: You can use the cash value of your policy to pay part or all of your policy premiums, making it easier to keep your coverage.

It is important to carefully consider the potential consequences of withdrawing funds from your life insurance policy, as it can impact the amount of death benefit your beneficiaries will receive, as well as the growth of your cash value account. Consulting a financial advisor can help you understand the potential impact on your specific policy.

You can surrender your life insurance policy for cash

Surrendering your life insurance policy means cancelling it and receiving a payout. This is an option if you have a permanent life insurance policy, which has a cash value component. Term life insurance policies, on the other hand, do not have a cash value and therefore cannot be surrendered for cash.

The cash surrender value of a life insurance policy is the amount you will receive if you cancel it. This is the total sum of money in the policy's cash account, minus any surrender fees or charges. Surrender fees tend to decrease over time, so the longer you've had the policy, the more cash you will receive.

If you surrender your policy, your beneficiaries will no longer receive a death benefit when you die. You will also owe taxes on the amount you receive that is above the sum of premiums you paid into the policy.

There are several alternatives to surrendering your policy if you want to access the cash value. You can:

• Withdraw funds from the cash value. Withdrawing up to the amount you've paid in premiums is usually tax-free, but withdrawals may reduce your death benefit.
• Borrow against the policy's cash value. Policy loans are flexible and have low-interest rates, but interest accumulates and you will owe taxes on the loan if the policy lapses.
• Use the cash value to pay your life insurance premiums.

Frequently asked questions