What You Need to Know About Using the Cash Value from Your Policy

The basics of using the cash value of your policy

To use the cash value of your life insurance policy, you are taking out a loan against the cash value. Life insurance loans are a feature available with many permanent life insurance policies, such as whole life and universal life insurance. These loans allow policyholders to borrow against the cash value of their policy. Here's how they work:

#1 - Building Cash Value

• Permanent Life Insurance: Unlike term life insurance, permanent life insurance policies build cash value over time. Part of the premiums you pay goes into this cash value account, which grows tax-deferred.

• Accumulation: The cash value grows based on the policy's terms, either at a fixed interest rate (whole life) or through investments chosen by the policyholder (variable life).

#2 - Eligibility for Loans

• Sufficient Cash Value: You can only take out a loan if your policy has accumulated enough cash value. Typically, policies require a few years of premium payments before a significant cash value is built.

• Policy Type: Only permanent life insurance policies with a cash value component allow for loans.
  

#3 - Borrowing Process

• Requesting a Loan: Contact your insurance company to request a loan. They will provide details on the maximum amount you can borrow, which is usually a percentage of the cash value.

• Loan Amount: The amount you can borrow depends on the cash value of your policy, often up to 90% of the available cash value.

#4 - Loan Terms

• Interest Rates: Life insurance loans typically have lower interest rates compared to other types of loans. The rate can be fixed or variable, depending on your policy.

• Repayment: You are not required to repay the loan on a set schedule. However, interest will accrue on the outstanding loan balance. Repaying the loan will restore the cash value and death benefit to their full amounts.

#5 - Impact on Policy

• Reduced Cash Value: Taking out a loan reduces the cash value available in your policy.

• Reduced Death Benefit: If the loan is not repaid, the outstanding balance and accrued interest will be deducted from the death benefit paid to your beneficiaries.

• Policy Lapse Risk: If the loan balance plus interest exceeds the cash value, your policy could lapse, meaning you would lose coverage.

#6 - Benefits of Life Insurance Loans

• No Credit Check: Loans against your life insurance policy do not require a credit check since you are borrowing from your own cash value.

• Flexible Repayment: You can repay the loan at your own pace, as long as the interest does not exceed the cash value.

• Tax-Free Loans: Borrowed funds are not considered taxable income, as you are borrowing against the cash value rather than withdrawing it.

#7 - Considerations and Risks

• Accruing Interest: Unpaid interest will add to your loan balance, reducing the available cash value and potentially the death benefit.

• Policy Lapse: Ensure you monitor your policy's cash value to prevent it from lapsing due to an unpaid loan balance.

• Impact on Beneficiaries: Be aware that any outstanding loan balance will reduce the death benefit your beneficiaries receive.

Example

Suppose you have a whole life insurance policy with a $200,000 death benefit and a cash value of $50,000. You decide to borrow $20,000 against the cash value. Here's what happens:

• Loan Balance: You receive $20,000.

• Interest Accrual: Interest accrues on the $20,000 loan. If the interest rate is 5%, the first year's interest would be $1,000.

• Reduced Death Benefit: If you do not repay the loan and pass away, the insurance company will deduct the $20,000 loan balance plus any accrued interest from the death benefit. If the interest is $1,000, the death benefit paid to your beneficiaries would be $179,000.

Closing Statement

Life insurance loans provide a valuable option for policyholders to access funds when needed, leveraging the cash value they've built over time. While offering flexibility and competitive interest rates, it's crucial to manage loans responsibly to avoid impacting your policy's cash value and death benefit. Understanding these features empowers policyholders to make informed decisions that align with their financial goals and long-term security