If you’ve heard it once, you’ve heard it a million times: life insurance is essential, especially if you have a family that relies on your income. If you die unexpectedly, your family’s financial necessities will be met, from the monthly mortgage to food expenses to your child’s college tuition.
While the fundamental goal of life insurance is income replacement, many policyholders use cash-value life insurance for other purposes, such as saving for retirement. Cash-value life insurance plans, often known as perpetual life insurance, give both a death payment and cash-value accumulation during the policyholder’s lifetime.
Policyholders with cash-value insurance can use the cash value in a variety of ways, including:
A tax-advantaged investment
A method of paying insurance premiums later in life
A benefit they will be able to pass on to their heirs
Whole life, variable life, and universal life all have a financial value built-in. Term life insurance does not.
KEY LESSONS
Permanent life insurance plans provide death payments as well as cash value buildup.
There is no cash value advantage with term life insurance.
You may put your money to use by making withdrawals or paying premiums.
Beneficiaries of these insurance receive only the death payments and no cash value accumulations.
Don’t Toss Your Money Away
Many policyholders do not make use of the cash value in their permanent life insurance policies, especially if the death benefit is no longer required. When the policyholder dies, the death benefit is paid to their beneficiaries.
in lieu of any leftover monetary value However, if the policyholder no longer needs to pass the death benefit on to beneficiaries, the policyholder can access the accrued cash value while still living by surrendering the policy fully or making smaller withdrawals or policy loans.
It should be noted that withdrawing funds from insurance reduces the death benefit. Taking out a policy loan is an option if the policyholder requires cash now but wants to maintain the death benefit for the future, repaying the loan amount over time.
We offer you some possibilities for your life insurance policy cash value below, including six common ways to help you get the most of it.
Permanent life insurance provides both a death benefit and a cash value amount, but recipients only get the death benefit upon death. The insurance company receives any residual monetary value
1st Strategy: Increase the Death Benefit
If you have amassed significant cash value in your permanent life insurance policy and do not intend to utilize it, you may choose to leave a bigger death benefit to your beneficiaries.
How did you manage that? It is typically rather straightforward. Simply call your life insurance provider and tell them you want to make a trade: You want to raise your policy’s death benefit in return for cash value. The corporation will do this since it does not want to lose your business. It will almost certainly approve your request.
The goal of the deal should be to totally drain the cash value and shift the entire amount to the death benefit or face value. For example, if you have a universal life insurance policy with a death benefit of $200,000 and a cash value of $100,000, your aim is to deplete the cash value and increase the death benefit to $300,000. That’s $100,000 extra that will go to your heirs rather than the life insurance company.
Pay Life Insurance Premiums (Strategy 2)
When you have enough cash value, you can use it to cover premium payments. This is referred to as “paid up.” The great majority of life insurance firms are happy to accommodate your request—all you have to do is ask. You might save $2,000 or more on premiums each year if you use this strategy.
Strategy 3: Get a Loan
If your insurance has a significant monetary value, you may choose to borrow against it. Life insurance firms frequently provide these cash-value loans at cheaper interest rates than a regular bank loan.
Of course, because you’re borrowing your own money, you’re not bound to repay the loan. It is crucial to know, however, that any money borrowed, plus interest, will be removed from your death benefit when you die.
Plan 4: Make a Withdrawal
If you’re running low on funds or just want to make a major purchase, you can withdraw some or all of your cash. Depending on your policy and the quantity of your cash value, such a withdrawal might reduce or even eliminate your death benefit.
While some plans diminish the death benefit dollar for dollar with each withdrawal, others (such as certain conventional whole life policies) reduce the death benefit by an amount more than what you remove. Before making any drastic actions, consult with your insurance agent about this strategy.
Strategy 5: Increase the Size of Your Investment Portfolio
Cash-value life insurance plans have grown in popularity in recent years among investors wishing to enhance their retirement income. If you have a strong cash value, you may use it as an asset in your retirement portfolio in a variety of ways.
. These assets are frequently guaranteed to grow tax-free for many years, which can significantly increase your nest egg.
Most consultants recommend that policyholders wait for at least 10 to 15 years before withdrawing cash value for retirement income. Consult with your life insurance agent or financial counselor to see whether this strategy is appropriate for your situation.
Strategy 6: Complete Surrender
Of course, you may always surrender your coverage and obtain the accrued cash value. Many issues must be considered before following this path. First and foremost, when you surrender a life insurance policy, you forfeit the death benefit, which means your heirs will get nothing from the policy when you die. Most of the time,
Surrender costs will also be imposed, which might significantly lower your cash worth.
Furthermore, the cash you get as a result of the surrender is taxed. If you have an outstanding loan balance on the policy, you may be subject to additional taxes.
In conclusion
Allow the cash worth of a permanent life insurance policy to build before selecting how to spend it. Also, be certain that the cash value is drained and redeployed later in life so that it does not wind up with the insurance after your death.
