Whole life insurance is a form of permanent life insurance that provides cover throughout your entire lifetime and accumulates cash value in the process. Its core function of providing for the death benefit is supplemented in whole life insurance by the buildup of cash. This makes them more adaptable than policies such as term life insurance, which gives cover for a certain number of years. Do you have questions regarding how to borrow cash against your entire life policy? Then this book is for you.
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What Is Whole Life Insurance?
Whole life policies pay you to stay insured for your lifetime, as long as premiums are maintained. Policies have a death benefit and savings component. Part of what you pay in premiums is used to build cash value, which earns a tax-deferred return over time. The cash value is a money reserve that you can draw upon during your lifetime.
In contrast to term life insurance, which pays a death benefit only for a set term (e.g., 10, 20, or 30 years), whole life policies have the double advantage of coverage for one’s lifetime and the potential to build up cash.
Why Would You Take Money Out of Your Whole Life Policy?
There are some reasons policyholders may take money out of their whole life insurance policies:
- Emergency Needs: Unforeseen situations such as medical situations or surprise repairs to the home.
- Education Funding: Paying for college or other educational expenses.
- Supplementing Retirement Benefits: Borrowing the cash value as a source of extra retirement income.
- Paying Off Debt: Paying off high-interest debt.
- Investing in Business: Financing the start-up or expansion of a business.
Recognize why you are borrowing the cash to assist you in making the best use of accessing the funds without sacrificing the benefits of your policy.
Methods of Accessing Funds from a Whole Life Policy
There are numerous ways through which you can access the cash value of your whole life insurance. Let’s talk about each of them:
Withdraw Directly from the Cash Value
You withdraw directly from the policy’s cash value. Let’s find out how:
- How It Works: You call your insurer and ask them to make a partial withdrawal.
- Limitations: You can borrow only up to the amount you’ve paid premiums free of taxes.
- Impact: Decreases both the cash value and the death benefit in proportion.
Direct Withdrawals are suitable for minor, short-term financial requirements. You’re warned, however, since large withdrawals will rob your policy of its long-term benefits.
Borrow Through a Policy Loan
Policy loans enable you to borrow against the cash value of your policy. It’s one of the most in-demand means of obtaining money since it comes with no credit check.
- How It Works: You borrow from the insurance company using your cash value as collateral.
- Interest Rates: The insurance company charges interest on the loan, which must be paid back to continue having the policy’s full benefits.
- Effect: Unpaid loans and interest will decrease your death benefit.
Policy loans have the benefit that they do not trigger tax liability unless the policy is surrendered or lapses.
Surrender the Policy
If the protection is no longer desired, you can simply surrender the entire policy to release its cash value.
- How It Works: You terminate the policy and receive the cash value built up, less any surrender charges.
- Effect: You forfeit the death benefit and coverage permanently.
- Tax Consequences: Any excess received over the total premiums paid is tax-deductible.
Forfeiture of the policy is a final option and usually selected when the policyholder no longer requires life insurance coverage.
Apply Dividends (If Any)
Part of whole life insurance policies pay dividends based on the insurer’s financial performance.
- How It Works: Dividends are received in cash, used to pay premiums, or invested to generate cash value.
- Effect: Cashing out dividends doesn’t impact the death benefit or cash value of the policy.
This choice is suitable for whole life policyholders who need access to money without using the cash value.
Life Settlement
A life settlement is selling your policy to another person for cash.
- How It Works: Your policy is purchased by a company, they pay you a lump sum, and you list them as the new beneficiary.
- Impact: You forfeit the coverage and the death benefit, but receive cash right away.
- Tax Implications: What you receive can be taxed.
Life settlements are better for older policyholders or for people who have high-value policies and no longer require coverage.
Things to Remember Before Cashing Out
It is not an impulsive decision to cash out your entire life insurance policy. The following should be remembered:
- Impact on Death Benefit: Loans and withdrawals will reduce the amount received by your beneficiaries.
- Tax Consequences: Consult a financial advisor to understand potential tax consequences.
- Policy Lapse Risk: Unpaid loans or significant withdrawals can lead to the policy’s lapse.
- Alternatives: Investigate other available financial resources before accessing your policy.
How to Begin the Withdrawal Process
If you’ve decided to withdraw money from your whole life policy, here are the steps to follow:
- Get in Touch with Your Insurer: Call your insurer to talk things over.
- Check Policy Terms: Read the fine print of your policy.
- Verify Tax Consequences: Consult a tax planner to play it safe.
- Complete Required Documents: Complete the forms or documentation your insurer requires.
- Monitor Your Policy: Follow what becomes of the benefits of your policy because of the withdrawal.
The Term Life Insurance Place in Financial Planning
While whole life insurance allows for cash value accumulation, term life insurance is straightforward and cheap coverage for a specific period. If your primary need is to have a death benefit without the added complexity of cash value, term insurance would be more appropriate.
Utilize such tools as a term insurance calculator to understand the coverage and premium that suit you. Let’s contrast term and whole life insurance and find out how you decide on the ideal policy that meets your financial requirements.
Conclusion
Whole life insurance has the distinct combination of lifetime coverage and cash accumulation. Familiarity with several ways to get your money out, such as withdrawals and policy loans, to name a couple, can be helpful to you. Yet, always weigh the long-term effect on benefits against your policy and make use of the guidance of financial and tax planners where applicable.
Whether you’re navigating an immediate financial need or planning for the future, your life insurance policy can be a valuable asset. For those looking for temporary coverage, exploring term life insurance with tools like a term insurance calculator ensures you’re prepared to make the best choice for your financial well-being.