If you are the pillar of your family and are concerned about your family’s financial future in the event of your death, life insurance can give you peace of mind. Life insurance can help your family meet funeral expenses, children’s education expenses, loss of income, and other financial needs. Life insurance can provide much-needed funds for loved ones left behind after your death. This financial protection for those who rely on you is the primary reason to purchase insurance. However, a life insurance policy can also provide you with money during your lifetime. In other words, if you have a life insurance policy with cash value, you can get cash for it. This is the advantage of whole life insurance and the main reason it is more expensive than term insurance (in addition to the fact that it is whole life insurance.
All the possible ways to access your cash from a life insurance policy
There are eight simple ways to withdraw the money, let’s go through them together,
Withdrawing cash from life insurance Policy
- When withdrawing money from a life insurance policy, you can do so tax-free. However, if you withdraw more than the cash value you have accumulated through the insurance, you will have to pay income tax on that money.
- Generally, you can withdraw money from insurance tax-free up to the number of premiums you have already paid. Any amount over and above the premiums paid is typically taxable.
- If you withdraw part of the money, the insurance remains in force. If you withdraw the total amount, the company will cancel the policy.
- Withdrawing money from the policy may make sense in some circumstances, but it will reduce the insurance benefits paid to your beneficiaries after your death. You may also have to pay unwanted taxes. Here are some situations in which withdrawing money from an insurance policy may not be a bad idea.
- College tuition
- Medical insurance for elderly parents
- Putting down a deposit on a new home
Settlement
- The first is to surrender the entire policy and pay cash equal to the surrender cost. However, if you choose this option, you will lose your life insurance coverage, and the amount you receive will be reduced by a fee. The cost of surrendering the policy can be high, especially if it is a current policy.
- Leaving insurance before retirement should be considered a last resort, especially if you don’t have other life insurance (in this case, consider getting a life insurance policy quote before signing any documents). If you want to terminate whole life insurance due to high premiums, consider using the cash value to pay off the policy.
Grow Your Nest Egg
- Cash-value life insurance has become very popular among investors who want to increase their retirement income in recent years. A substantial accumulation of cash values can be used in many ways as an asset in your retirement portfolio. In many cases, these funds have the
- Guarantee to grow tax-free for many years and can significantly increase retirement funds.
- Many advisors say policyholders should let their policies grow for at least 10 to 15 years before using the cash value to generate income in retirement. Consult your life insurance company or financial advisor to see if this strategy is right for you.
Borrow the Money You Need
- Instead of taking money out of insurance, you can borrow money. For example, borrowing against life insurance can give you quick cash for a car purchase, retirement benefits, or temporary expenses when you lose your job.
- Loans are tax-free, so it’s the most common way for policyholders to get cash,” says Chris Abrams, founder of Abrams Insurance Solutions in San Diego (unless they take out a loan on a variable policy).
- Also, you don’t have to pay back the amount you borrowed. However, if you do not pay it back, the deduction will happen from the death benefit paid to your beneficiaries.
- Like any other loan, there are costs that have an association with taking out a loan. As a result, over time, interest accrues, and the amount you pay increases.
Selling Policies for Cash
- By selling the policy to a third party, which is called a “life insurance policy”, you can get more money than the policy’s cash value. The third party pays a lump sum less than the death benefit and more than the cash value of the policy. The buyer then pays the premium. In the event of death, the investor receives the premium.
- If the urgent need for cash value outweighs the need for life insurance, a settlement should be considered.
Use the cash value to pay life insurance premiums
Generally, you can pay some or all of the life insurance premiums from the cash value, making it easier to maintain coverage. This is a popular option for older policyholders who want to use their retirement income for living expenses while maintaining life insurance coverage.
Cash advances on credit cards
- Most credit cards allow you to borrow a certain amount of money, called a cash advance, which can amount to hundreds or even thousands of dollars.
- While this may be appropriate for short-term crises, cash advances usually come with higher fees and interest rates than those charged by the card. Cash advances can also lower your credit score by increasing your credit utilization. If you can’t pay back a cash advance right away, it may not be the best option.
Loan Participation
An equity loan is a loan that allows you to borrow a portion of the equity in your home at a fixed interest rate. You can calculate Home equity by subtracting the mortgage balance from the home’s current market value. Equity loans are often in use for major purchases, home improvements, or emergency needs.
The Bottom Line
Consult your insurance agent or financial advisor before choosing one of these life insurance policies. Discuss how each option will affect your policy. Also, ask yourself if there are better alternatives using cash values to get the money you need. If you buy a policy to provide financial security for your dependents after your death, you wouldn’t want to jeopardize it by depleting the policy through cash values.
Author Bio
Lily Poole is a Property and Smart Apple insurance officer by profession. She is pretty well experienced in the life insurance policy and accounting field and has an impressive profile in the training and development industry.
