How to capture cash value in life insurance. If you’ve heard it once, you’ve heard it a million times:
Life insurance is a must, especially when you have a family that depends on your income.
If you die unexpectedly, a life insurance plan will ensure your family’s financial needs are covered, from your monthly mortgage to grocery bills to your child’s college education.
While income replacement is the primary goal of life insurance, many policyholders turn to cash value life insurance for other reasons, such as building a retirement fund pool.
Also known as permanent life insurance, cash value life insurance policies provide both a death benefit and an accumulation of cash value over the policyholder’s life.
The face value and practical value in life insurance
With cash value policies, policyholders can use the cash value in a variety of ways, including:
- An investment with tax protection
- A means to pay policy premiums later in life
- A benefit they can pass on to their heirs
Whole Life, Variable Life, and Universal Life have a built-in cash value. Term life no.
- Permanent life insurance policies offer cash value accumulation and death benefits
- Term life insurance does not provide a cash value benefit
- It is possible to use strategies such as withdrawals or paying bonuses to use your cash
- Beneficiaries of these policies only receive death benefits, not cash value accumulations.
Don’t throw away your cash value.
Too many policyholders make the costly mistake of leaving a wad of the cash value in their whole life policies.
When the policyholder dies, their beneficiaries receive the death benefit, with the remaining cash value going back to the insurance company.
In other words, they are essentially throwing away that accumulated cash value.
Fortunately, they can take steps to ensure they don’t throw away their cash value.
Here are six popular strategies to help you get the most out of your permanent life insurance cash value.
Strategy 1: Increase the death benefit
Suppose you’ve built up considerable cash value over the life of your permanent life insurance policy, and you don’t intend to use those funds yourself. In that case, you may choose to leave an immense death benefit to your beneficiaries.
How can you do that? It is usually straightforward. Just call your life insurance company and say you’re interested in trading:
You would like to increase the death benefit in exchange for your policy’s cash value. Since the company does not want to lose your business, it will most likely accept your application.
During the trade, your goal should be to completely drain the cash value and transfer the entire amount to the death benefit or face value.
For example, if you have a universal life insurance policy with a $200,000 death benefit and $100,000 in cash value, your goal is to empty the cash value and increase the death benefit to $300,000.
That’s $100,000 more that will go to your heirs instead of going to the life insurance company.
Strategy 2: Pay life insurance premiums
Once you’ve built up enough cash value, you can tap into it to cover your premium payments.
This is known as “payment.” The vast majority of life insurance companies are willing to honor this request. All you have to do is ask.
You could save $2,000 or more in premiums each year using this tactic.
Strategy 3: Ask for a loan
If you’ve built up considerable cash value, you may also take out a loan against your policy.
Life insurance companies often offer these cash value loans at lower interest rates than a traditional bank loan.
Of course, you are not obliged to repay the loan since you are essentially borrowing your own money.
However, it’s important to note that any money you borrow, plus interest, will be deducted from your death benefit.
Strategy 4: Withdraw
If you’re short on funds or want to make a large purchase, you can withdraw some or all of your cash value.
Depending on your policy and the size of your cash value, such a withdrawal could reduce your death benefit or even eliminate it.
While some policies are reduced dollar-for-dollar with each withdrawal, others (such as some traditional whole life policies) reduce the death benefit by more than you withdraw.
Be sure to discuss this tactic with your insurance agent before making sudden moves.
Strategy 5: Grow the nest egg
In recent years, cash-value life insurance policies have become very popular with investors looking to supplement their retirement income.
If you’ve built up healthy cash value, you can use these funds in various ways as an asset in your retirement portfolio.
Often these funds are guaranteed to grow tax-deferred for many years, which could bolster your savings.
Most advisers say policyholders should give their policy at least 10 to 15 years to grow before tapping into the cash value for retirement income.
Talk to your life insurance agent or financial advisor to see if this tactic suits your situation.
Strategy 6: Total Surrender
Of course, you always have the option to surrender your policy and receive the accumulated cash value.
Before taking this route, it is essential to consider many factors.
First, you give up the death benefit when you surrender a life insurance policy, which means your heirs will receive nothing from the policy when you die.
In most cases, you will also be charged a surrender fee, which could significantly reduce your cash value.
In addition, the money you receive through delivery is subject to income tax. If you have an outstanding policy balance, you could incur more taxes.
The final result
Don’t let cash value build up in a permanent life insurance policy without deciding how you’ll use it.
And make sure the cash value is drained and relocated later in life so it doesn’t end up with the insurer after your death.