Want Cash? Tap into Your Life Insurance Policy
There may come a time in your life when you need some extra money, and perhaps rather than borrowing from a bank or other financial institution, you may want to tap into your whole life insurance policy.
Life insurance is a financial safety net that can provide your family with much-needed cash for when you die – but it can also provide cash for you when you’re still living – that is if you have a cash value life insurance policy.
This is one of the major perks of having a permanent policy – and one of the main reasons it costs a bit more than a term life insurance policy.
Life Insurance Policies
If you want to borrow the whole amount of your life insurance policy or just part of it, it depends on the type of whole life policy you have taken out initially. There are two basic types of life insurance, which are known as term and whole life insurance policies.
- Whole life is sometimes called permanent or whole life insurance, and it covers several subcategories, including traditional whole life, universal life, variable life and variable universal life. Permanent or whole life policies also have a savings component, which can build cash value that can help your family meet financial emergencies, perhaps help pay for particular goals, or provide income for retirement years.
- Whereas term insurance policies provide life insurance coverage for a specified period, which is usually greater than one year. Term policies don’t provide any further benefits when the term expires, and there is no build-up of cash value. If this insurance is not renewed at the end of the specified term, coverage lapses, and no payment would be made to the beneficiary in the event of death.
A whole life policy is a more expensive type of life insurance than others, but it has no expiration date. The policy term lasts the entire length of your lifetime. Although the monthly premiums may be slightly higher than other types of insurance policies, the money paid into your life insurance policy that exceeds what is needed for the death benefit is invested by your life insurance company, which creates a cash value after a few years, that you may be able to tap into.
So, there are essentially two values to a permanent or whole life policy – the face value, also known as the death benefit, and the cash value that acts as a savings account.
Once you’ve invested money, it’ll start to increase the amount of the death benefit and the tax-free cash value that can then be borrowed against. It is important to appreciate that the policy loan is not taken out of your death benefit but is borrowed against it. Your insurance company uses your policy as collateral for the loan.
Putting it simply then, permanent life insurance policies are financial back-ups for your family when you die so that they will be left financially secure. The amount of life insurance you pay depends on your specific financial situation, family circumstances, and the stage you are at in your life.
Want Cash – Now?
You don’t have to withdraw money from your policy – you can borrow it, but, like any loan, there’s a charge to borrow. And, when borrowing from your cash value, you have to be careful not to borrow too much cash because if the amount of the loan, as well as the interest owed, reaches the total cash value of the policy, the policy can lapse.
The last resort to get cash is surrendering your policy to get the full cash value, minus any surrender charge. However, you’ll have to pay taxes on any gains earned on the cash value portion of the policy.
Also, you can tap into cash value with a withdrawal or a loan. If you take a loan, it’s tax-free if pay it back, but with interest, unless there is enough cash generated by the policy to cover the loan payment.
If you happen to make a withdrawal, there is no tax to pay if the amount of the withdrawal is less than the amount of the cash value that has been accrued by the premiums you paid.
Or, you could opt for another alternative if you want to sell your policy for cash…You can get more than the cash value of your policy by selling it to a third party through a process called a life settlement.
What is Cash Value?
If you need to sell your policy for cash, you won’t be alone. When you buy a cash value insurance policy, the premium you pay also contributes to your cash-value account. The cash value in your life policy grows at either a fixed or variable rate, depending on the type of policy you have.
Therefore, if you have a life insurance policy with cash value, you have various options for extracting value from it while you’re still alive:
- You can withdraw money from the policy
- You can surrender the policy completely
- You could borrow or get a loan against the policy
- Or you can use the policy to pay your premiums
Cash surrender value – You can ask for a cash surrender value to be paid. This is the cash value minus the surrender charge. This will end the policy, so you should only do this if you no longer need insurance or have a new policy in place.
By taking the surrender value, you’ll have to pay income taxes on any investment gains that were part of the cash value.
Can You Sell Your Life Insurance Policy?
If you want to sell your policy for cash, you can do that, so long as you sell your life insurance policy for cash in a transaction called a life settlement. If you are 65 or older, you can typically sell your life insurance policy as long as the face value exceeds $200,000.
The third party will then pay you a lump sum that’s less than the death benefit on the policy—but more than the cash value. The buyer will then pay the policy premiums, and when you die, the investor collects the death benefit.
You could also consider a life settlement if you have an immediate need for cash that outweighs the need for life insurance., but you need to be a certain age – at least 65, or have a certain number of health issues in order to qualify.
If you need cash quickly, there are ways of getting cash from your life insurance policy – you can even sell your policy for cash – but you need to be aware of what impacts these will have on your policy long-term.