How To Withdraw From Your Life Insurance Policy

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person dies. There are two main types of life insurance: term and permanent. Term life insurance is purchased for a specific period, whereas permanent life insurance is kept for as long as the policyholder needs it. Permanent life insurance can be further divided into two types: whole life insurance and universal life insurance.

Whole life insurance is a permanent form of insurance that allows for a fixed death benefit coverage over the policyholder's life. It also contains a cash-value account, which can accumulate as interest accrues on a fixed rate and a tax-deferred basis. Policyholders can borrow against their whole life policy, but the benefit acts as collateral, so the benefit shrinks if the loan is not repaid.

Universal life insurance is another form of permanent life insurance that offers a death benefit and a cash value account. Universal life insurance stays with the policyholder until the end if they pay their monthly premiums. There are three kinds of universal life insurance: variable, guaranteed, and indexed. Unlike other types of policies, all three versions of universal life insurance provide the flexibility to change the death benefit or lower the premiums.

Some life insurance policies can also be used as a financial asset during the policyholder's life. Depending on the plan, policyholders may be able to take out a loan from their policy, use it as collateral for a loan, withdraw funds, receive accelerated benefits, or cash out the policy.

You can borrow against your whole life policy, but the benefit acts as collateral

Borrowing against your whole life insurance policy is a quick and easy way to get cash in hand when you need it. However, it is important to note that you can only borrow against a permanent life insurance policy, which includes whole life insurance and universal life insurance. These policies are more expensive than term life insurance but have no predetermined expiration date. As long as sufficient premiums are paid, the policy remains in force for the lifetime of the insured.

The cash value of a life insurance policy is equivalent to the amount of money that would be received if the policy were to be surrendered. With each premium payment, a portion of the money goes towards the cash value. This cash value grows over time, with interest, and can be borrowed against. However, it is important to note that the benefit acts as collateral. If the loan is not paid off, the death benefit will be reduced.

The process of borrowing against a whole life insurance policy is straightforward. The policyholder simply fills out a form from the insurer, and the money is deposited into their account, usually within a few days. There are no loan requirements or qualifications other than the available cash value amount, and the funds can be used for any purpose. Additionally, policy loans do not affect credit scores and have relatively low-interest rates.

While borrowing against a whole life insurance policy can be a convenient way to access cash, there are some potential drawbacks to consider. If the loan is not paid back, the policy could be lost, resulting in a significant tax bill. Additionally, the death benefit will be reduced if the loan is not repaid by the time of the insured's death. Therefore, it is important to carefully consider the pros and cons of borrowing against a whole life insurance policy before making a decision.

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

Collateral assignment is most common in small-business lending, as many entrepreneurs sink most, if not all, of their savings into their ventures, and may not have many sources of equity to tap. It is also a common requirement for Small Business Administration (SBA) loans. In this case, term life insurance is the product most often used, with the term of the policy being at least as long as the length of the loan.

If you are using a permanent life insurance policy as collateral, it is likely that the lender will require the policy to have accrued cash value. This is because the cash value makes the policy a tangible asset, and the lender could access these cash reserves if necessary.

If you default on the loan, the lender will have first claim to your policy's death benefit. Therefore, it is important to understand the potential drawbacks of this borrowing option. For example, if you pass away before the loan is paid off, the amount that your beneficiaries would have received will be reduced since the lender has first rights to the death benefit.

You can withdraw funds from your life insurance policy

Life insurance can be a vital component of a comprehensive financial plan, providing financial protection to your loved ones after your death. However, some types of life insurance policies also have cash accounts that you can tap into while you're still alive.

Types of Life Insurance Policies

There are two major types of life insurance: term and permanent. Term life insurance only provides a death benefit to your beneficiaries after your death and only pays out if you pass away within a certain number of years. It doesn't have a cash value component. Permanent life insurance, on the other hand, has both a cash value and a death benefit.

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 withdraw money from your policy or borrow funds from the insurer, using your policy as collateral, to pay for expenses while you're still alive.

Whole and Universal Life Insurance

The two main types of permanent life insurance are whole life insurance and universal life insurance. While both are permanent, provide a designated death benefit, and can build cash value, the main difference between them has to do with guarantees and flexibility. Whole life insurance offers guaranteed level premiums and a death benefit that stays the same for the length of the policy. It also has a guaranteed rate of cash value growth, meaning you can predict the minimum cash value your policy will have over time.

Universal life insurance offers more flexibility with fewer guarantees. It gives you the freedom to adjust your premiums up or down within a certain range, which can be helpful for people with variable incomes. However, this can affect the rate of cash value growth and even the death benefit amount if minimal premium payments are made for too long.

Withdrawing Funds from Your Life Insurance Policy

There are several ways to withdraw funds from your life insurance policy:

• 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, your death benefit will likely be reduced, and you should 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.
• 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.
• 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.

You can cash out your life insurance policy

There are two main types of life insurance: term life insurance and whole life insurance. Term life insurance does not typically offer a cash-out option, whereas whole life insurance includes a cash value component that can be withdrawn or borrowed against.

Withdrawal

You can withdraw a portion of the cash value of your whole life insurance policy. Withdrawing more than you've paid in premiums could be taxable, but withdrawals up to the amount of premiums paid are often tax-free.

Loan

You can take out a loan against the cash value of your whole life insurance policy. Loans typically don't need to be repaid, but the amount will be deducted from the death benefit if it remains unpaid.

Surrender

You can cancel your whole life insurance policy and take the cash surrender value. This option usually involves surrender fees and could be taxable. Surrendering your policy will also cancel the death benefit.

Life Settlement

You can sell your whole life insurance policy to a third party for more than its cash surrender value but less than its net death benefit.

You can take out a loan on the guaranteed cash value of your life insurance policy

Borrowing against your life insurance policy is a convenient way to access funds for major expenses. However, this option is only available if you have a permanent life insurance policy with a cash value component. Term life insurance policies, which are valid for a set number of years, do not offer this benefit.

Permanent life insurance policies, such as whole life and universal life insurance, allow you to build a cash value over time. This cash value can be borrowed against, but there are some important considerations to keep in mind.

First, it takes time to build up enough cash value to borrow against. This usually takes several years, depending on the structure of your policy and the premium amount. Second, there is no fixed repayment schedule for life insurance policy loans, but it is important to make regular payments to avoid a policy lapse. Failure to repay the loan before your death will result in a reduced death benefit for your beneficiaries. Additionally, interest will accrue on the loan, and if it exceeds the cash value of your policy, it could cause a lapse in coverage.

When considering a loan against your life insurance policy, it is essential to weigh the pros and cons. On the positive side, there is no credit check required, and the interest rates are typically lower than those of traditional loans. You also have the flexibility to repay the loan at your own pace. However, if the loan and interest are not repaid, there can be tax implications, and your beneficiaries will receive a smaller payout.

In conclusion, taking out a loan on the guaranteed cash value of your permanent life insurance policy can be a good option for those who need immediate funds and have a sufficient cash value built up. However, it is important to understand the risks and repayment requirements to avoid negative consequences.

Frequently asked questions