3 Ways to Tap Your Life Insurance While You’re Living
by Ray Sagner on Dec 4, 2017
Most financial planners agree that life insurance is essential for protecting families against financial loss, which is why many recommend purchasing the maximum amount needed at the cheapest cost using a term policy. Where they start to diverge in their thinking is in any discussion about life insurance as an asset. Clearly, term life insurance would not be considered an asset as it is purely a death benefit with no savings element. However, cash value life insurance is definitely an asset, especially when you consider its unique properties and its ability to fund certain needs while you are alive.
While the premiums are more expensive than term life insurance, for those who are concerned with maintaining coverage for an extended period of time, beyond 25 years, it can be a more efficient way to own life insurance. This could apply to business owners, families with only one breadwinner, families with special needs children and families with a large estate to preserve and protect. The cash value buildup not only keeps the cost of insurance down in the later years, it can be used to pay the premium which can reduce the out-of-pocket costs of the policy. But, it is the ability to access the cash value for different needs throughout one’s lifetime that makes life insurance an asset.
Here are three ways the cash value in a life insurance policy can be accessed and used while you are living.
Access Cash Value
The cash value in permanent life insurance policies can be accessed for any purpose in one of three ways:
Policy loans: Although the rules vary from company to company, most policies allow for low-interest loans on accumulated cash value. The money can be used for any purpose and there is no requirement to pay the money back; except that the loan will continue to accumulate interest charges and the outstanding loan balance will be deducted from the death benefit when it is paid. Most policies still credit a minimum rate on the borrowed money, so the net loan cost can be very low.
Withdrawals: With many types of cash value policies, policyholders may withdraw money from accumulated cash value. However, if the withdrawal reduces the cash value to below a certain threshold, the policyholder may be required to pay extra premiums.
Surrender: You can surrender or cancel a cash value policy at any time and receive the accumulated cash value.
Access Living Benefits
Many policies issued today offer living benefits. With some policies the benefit is standard, but it typically comes as an option or rider on the policy at an additional cost. The level of benefits and eligibility varies from one policy to the next; however, they typically allow for up to 50% of the death benefit to be paid as an accelerated benefit in the event of a chronic or terminal illness or to cover the cost of long-term care.
If, after holding the policy for a number of years, you decide you no longer need the coverage, you can sell the policy. Life settlement companies offer to pay an amount that is more than the cash value, but less than the death benefit. The new owner takes over premium payments and becomes the beneficiary of the policy. This option may be more preferable than simply letting your policy lapse if you no longer want to pay the premiums.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.