Life Insurance and Cash Value: How Does this Work?
Sometimes, you need a little boost in cash flow, and the couch cushions are regrettably coin-free. That’s okay. You can sometimes find extra income in the most unlikely places. Your life insurance policy is designed to protect your family down the road, but sometimes can be used for more immediate needs.
The amount building up in your policy is called its cash value, and you may borrow against or withdraw those funds.
What Are Whole Life and Term Life Insurance?
First, it’s important to determine what type of life insurance policy you have. A term life insurance policy is set to run for a predetermined length of time, after which it ends. If anything happens to the policyholder during the term, a death benefit is paid to the beneficiary. A whole life insurance policy is a little more expensive, but runs for the entirety of the policyholder’s life, after which it pays out to a beneficiary. Whole life policies typically have a cash value and most term life policies do not.
For term life to receive any funds other than the death benefit, you may need to purchase a return of premium policy or rider. In that case, if the term ends, and the policyholder has never had to collect on the policy, some or all of the premiums paid are returned to the policyholder. That said, you’d have had to specify that option policy upon opening it, and wouldn’t be able to collect until the term ends.
What Is Cash Value?
If you have a whole life insurance policy or some term policies, the premiums you pay go toward the eventual death benefit. But that money doesn’t have to just sit in one place. The amount building up in your policy is called its cash value, and you may borrow against or withdraw those funds.
Before we continue: Please, talk to your insurance Agent and a financial professional before taking the next steps.
Accessing a Policy’s Cash Value
Borrowing against the cash value of your whole life insurance policy is like most other loans, with one exception: You may not need to repay it. You can and should, certainly, but any amount left unpaid upon your death plus any interest due is subtracted from the death benefit. That leaves less for your beneficiary, so we recommend paying it back. Just like other loans, you will be charged interest on the loan that you must pay or the interest will be added to the loan. If the loan plus any unpaid interest exceeds the cash value of the policy, there may also be provisions that an excessive loan balance can terminate the policy.
You may also withdraw funds from the cash value of universal life policies, which does not require repayment, but does decrease your death benefit. You can always pay more than your premiums later to make up the difference, which may help when you need quick cash but anticipate your fortunes later changing for the better.