Cashing In On Employer Whole Life Insurance: Your Options Explained

Whole life insurance is a type of permanent life insurance that provides lifetime coverage with guaranteed level premiums. It is a versatile financial tool that can offer added protection for your loved ones in the event of your death, as well as provide a wealth-building opportunity through its cash value growth component. This cash value can be accessed in several ways, including taking out a policy loan, withdrawing cash from the policy, or surrendering the policy altogether. It is important to carefully consider the benefits and drawbacks of each option, as well as consult a tax advisor, as there can be potential tax consequences and impact on the death benefit payout.

How to Cash in Employer Whole Life Insurance

Borrowing from your policy

Borrowing from your whole life insurance policy can be a quick and easy way to get cash when you need it. However, it's important to understand the specifics and potential risks before borrowing. Here are some key things to know about borrowing from your whole life insurance policy:

Eligibility

Whole life insurance policies are a type of permanent life insurance that builds cash value over time. This cash value can be borrowed against, but it takes time to accumulate. In the early years of the policy, the cash value may be relatively low, and it usually takes a few years for it to build up sufficiently to borrow against. Additionally, term life insurance policies, which are designed to last for a limited period, typically do not have a cash value component and therefore cannot be borrowed against.

Borrowing Process

Borrowing from your whole life insurance policy is a straightforward process. You can reach out to your insurance agent or company and fill out a basic form. If your policy has sufficient cash value, you can get the funds within a few business days, with minimal red tape and no credit check or approval process. The amount you can borrow is based on the value of the policy's cash accumulation account and the contract's terms. Typically, you can borrow up to 90% of the policy's cash value.

Interest and Repayment

Interest rates on policy loans are generally lower than those for personal loans or credit cards, ranging from 5% to 8%. While there is no mandatory monthly payment, it's important to manage the loan carefully. Interest accumulates on the outstanding balance, and if left unpaid, it can cause the loan balance to exceed the policy's cash value, leading to potential tax consequences and policy lapse. You can choose to pay off the loan on your own terms or let the debt be settled when the policy terminates. However, keeping the loan active without repayment will reduce the death benefit for your beneficiaries.

Tax Implications

Borrowed amounts from whole life insurance policies are generally not taxable as long as the policy stays active and is not classified as a modified endowment contract. However, if the loan remains unpaid and the policy lapses, or if you surrender the policy with an outstanding loan, the borrowed amount may become taxable. Additionally, if you withdraw cash value gains or withdraw more than your total premiums paid, there may be tax consequences. Consult a tax advisor to understand the potential tax implications for your specific situation.

Impact on Death Benefit

Borrowing from your whole life insurance policy will reduce the death benefit for your beneficiaries if the loan is not repaid. It's important to consider this trade-off between short-term financial relief and long-term coverage for your loved ones.

Withdrawing funds from your policy

Withdrawing funds from your whole life insurance policy is a process that requires careful consideration. Here are the key points to keep in mind:

Understanding the Withdrawal Process

Before initiating any withdrawals, it is essential to understand how the process works. Whole life insurance policies accumulate a cash value over time, and this is the portion of the policy that you can withdraw from. The cash value component is separate from the death benefit and premium payments. The longer you have held your policy, the more cash value it is likely to have accumulated.

Choosing a Withdrawal Method

There are a few different ways to access the funds in your whole life insurance policy:

• Withdrawal: You can typically withdraw limited amounts from the cash value of your policy. Withdrawals are generally not taxable up to your policy basis if the policy is not a modified endowment contract (MEC). However, withdrawals may reduce your death benefit, and they can have unexpected tax consequences, especially if made during the first 15 years of the policy.
• Policy Loans: Borrowing against the cash value of your policy is often a more flexible option. Policy loans usually have lower interest rates than personal loans and don't require a loan application or credit check. Additionally, you are not obligated to repay the loan, but any outstanding balance and interest will be deducted from the death benefit.
• Surrender: Surrendering your policy means cancelling it and receiving a cash payment. This option should be a last resort as you will lose your life insurance coverage, and the cash received may be subject to surrender fees and taxes.

Weighing the Withdrawal Consequences

Each withdrawal method has its own set of consequences. Withdrawals and policy loans may reduce your death benefit, while surrendering your policy means giving up the right to the death benefit altogether. Additionally, there may be tax implications depending on the amount withdrawn and the specifics of your policy.

Initiating the Withdrawal

Once you have decided on a withdrawal method and considered the potential consequences, you can initiate the withdrawal process by consulting a financial or insurance professional. They will guide you through the steps needed to access the funds in your whole life insurance policy.

Surrendering your policy

Step 1: Understand the implications

Before surrendering your policy, it is important to consider the consequences. Firstly, you will no longer have life insurance coverage, and your beneficiaries will not receive the death benefit upon your death. Secondly, surrendering the policy may result in a financial loss, as the cash surrender value may be lower than the total premiums paid. Additionally, there may be surrender fees and tax implications, especially if you have an outstanding loan from the policy. Therefore, it is advisable to consult with a tax or financial advisor before making any decisions.

Step 2: Contact your insurance company

You can initiate the surrender process by contacting your insurance company. They will guide you through the steps and documentation required to collect the cash surrender value. They will also inform you about any fees or charges that may apply.

Step 3: Submit the required documentation

You will need to submit a surrender request form or a policy termination form to your insurance provider. Make sure you have all the necessary documentation, including the contract, riders, amendments, and premium payment receipts.

Step 4: Receive the cash surrender value

After processing your request, your insurance provider will pay you the cash surrender value, which is the amount accrued within the policy minus any applicable fees, outstanding loans, or interest owed. This payment is typically made via check or electronic transfer.

Step 5: Obtain policy termination confirmation

Once you have received the cash surrender value, your insurance provider will send you a confirmation of policy termination. If you do not receive this confirmation, be sure to request it from your insurance provider.

It is important to carefully consider your options before surrendering your employer whole life insurance policy, as it will result in the loss of your life insurance coverage and may have financial implications.

Paying policy premiums using your cash value

Paying policy premiums using the cash value of your whole life insurance is a great way to ensure that your coverage remains intact. Here are some key points to consider:

Understanding Cash Value

The cash value of your whole life insurance policy is essentially a savings component that grows over time. A portion of your premium payments goes into this savings account, which earns interest, typically at a fixed rate. This cash value offers a living benefit, meaning you can access it while you're still alive.

Withdrawing vs. Borrowing

You can choose to withdraw or borrow money from the cash value of your policy. Withdrawing means taking out a portion of the accumulated cash value, which can be done tax-free up to the total amount of premiums paid. On the other hand, borrowing allows you to take out a loan using the cash value as collateral, and you're not obligated to pay it back. However, interest will accrue on the outstanding balance.

Impact on Death Benefit

It's important to note that withdrawals and outstanding loan balances will generally reduce your death benefit. Withdrawals may directly reduce the death benefit, while loans will reduce the amount your beneficiaries receive dollar for dollar. Carefully consider the impact on your coverage before accessing your cash value.

Alternative Options

If you want to preserve your death benefit, there are alternative ways to access cash from your policy. Some policies allow you to use the cash value to pay your premiums, essentially covering the cost of insurance without an out-of-pocket expense. Additionally, you can explore options like borrowing against your 401(k) or taking out a home equity loan.

Tax Implications

When withdrawing from your cash value, be mindful of potential tax implications. Withdrawals up to the total amount of premiums paid are generally not taxable. However, if you withdraw any gains or dividends, these amounts may be taxed as ordinary income. Consult with a tax advisor to understand the specific tax consequences for your situation.

By understanding these aspects, you can effectively utilize the cash value of your whole life insurance policy to pay your premiums and maintain your coverage. Remember to weigh the benefits and drawbacks of each option before making any decisions.

Tax implications of cashing out

When you cash out your whole life insurance policy, you will not receive the face value. Instead, you will receive the cash value, minus any required fees. The cash surrender value of a life insurance policy is the amount you will receive if you surrender your policy to your insurer. This amount is based on your cash value, the component of a permanent life insurance policy that can help you build cash value through regular premium payments.

The cash surrender value of a life insurance policy can be taxable. Any amount you receive over the policy's basis, or the amount you paid in premiums, can be taxed as income. For example, if you have a whole life insurance policy with a cash value of $15,000 and you've paid a total of $10,000 in premiums, you may be taxed on the additional $5,000. However, if you decide to withdraw $4,000 from the same policy, that amount would not be taxable as it does not exceed the amount you've paid in premiums.

Withdrawing from your cash value allows you to access your wealth without a loan and without surrendering your policy. However, withdrawals may trigger tax consequences if you withdraw investment gains. Withdrawals are treated as taxable to the extent that they exceed your basis in the policy. Additionally, withdrawals that reduce your cash surrender value could cause your premiums to increase to maintain the same death benefit; otherwise, the policy could lapse.

If you borrow from your cash value, the borrowed amounts from non-modified endowment contract (MEC) policies are not taxable. You also don't have to make payments on the loan, even though the outstanding loan balance might be accruing interest. However, loan balances generally reduce your policy's death benefit, meaning your beneficiaries might receive less than you intended. Additionally, an unpaid loan that is accruing interest reduces your cash value, which can cause the policy to lapse if insufficient premiums are paid to maintain the death benefit. If the loan is still outstanding when the policy lapses or if you later surrender the insurance, the borrowed amount becomes taxable to the extent the cash value (without reduction for the outstanding loan balance) exceeds your basis in the contract.

When you surrender your life insurance policy, you will receive a one-time payment for the cash value of your policy, minus any surrender fees charged by the life insurance company. In return, your policy will be terminated, and your beneficiaries will not receive a death benefit. For whole life insurance, the cash surrender value of your life insurance may be taxable.

It's important to consult with a tax advisor or insurance professional to understand the specific rules and potential tax implications of cashing out your whole life insurance policy.

Frequently asked questions