If you are in a financial bind and need cash quick, or need extra cash for a large expense, you may be overlooking your life insurance policy as a potential solution. There are several ways to get cash from your life insurance policy, but there are some things you should know before you think about doing so.
First, it’s important to know that you cannot take money out of a term life insurance policy because they don’t have a cash value element. Whole life or permanent life policies have cash value that you may be able to access when you need really need it.
Canceling your whole life policy and taking the surrender value is one option, though it is not always ideal. You will get the cash value, minus fees, and you may have to pay a large penalty depending on how long you have had the policy. You will also no longer be covered and your beneficiaries and loved ones will not receive a death benefit when you die. For these reasons, it is typically inadvisable to surrender your policy unless you are completely sure you won’t need it.
You can also make a withdrawal. Many policies will allow you to withdraw a portion without cancelling your coverage. However, your beneficiaries will generally receive a reduced death benefit.
In some cases, a better option might be to borrow against the cash value of your life insurance by taking out a policy loan. When you do this, the insurance company is loaning you money using your policy’s cash value as collateral.
Borrowing from life insurance can be easier than borrowing from a bank because there is typically no credit check and the loan won’t affect your credit in any way. As long as you have enough cash value in your policy, you can take out a policy loan without any kind of application process because you are essentially borrowing from yourself. Keep in mind, it can take many years to build up a cash value balance that is large enough to borrow against. Also, they tend to have lower interest rates and more flexible timeframes for repayment than a standard bank loan.
It is important, however, to pay the loan back if you can. Interest on the loan will continue to accrue if you aren’t paying the monthly bill, and if that causes the loan to exceed your policy’s cash value, the policy will lapse. If you die before paying the policy loan back, the remaining balance will be deducted from the death benefit your beneficiaries receive.
Insurance and annuity guarantees are backed by the financial strength and claims paying ability of the issuing company. Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change. You should consult a tax professional.