Permanent life insurance policies, such as universal, variable, and whole life, offer more than just a death benefit. Some policies include cash value, which can be a pool that you can use while you are still alive.
The cash value of a policy that has been in existence for many years could be substantial. Jonathan Howard, a certified financial advisor with SeaCure Advisors, Lexington, Ky., says that the accumulation can be greater than what you put in. This opens up many options.
Permanent life insurance’s cash value is your money. You can tap it as often as you need, but the type of policy and carrier will determine your options. Ask the insurer before you do anything. This will help you determine how much cash you can withdraw each year, based on your policy terms and the cash balance. You could lose your policy’s cash value if you withdraw too soon.
It’s a great way to live!
It is more tax-efficient to only withdraw what you actually use each year. Howard suggests that you keep some money in an emergency fund for 12 months to cover expenses. The rest can be used to supplement your retirement income. Drawdowns draw down the tax-free premium payment first. Taxes are due only when you begin withdrawing the gains.
A policy loan can be used to tap into the cash value. This way, you won’t have to pay taxes. You’ll be able to repay the money. However, you cannot reverse withdrawals. The death benefit will pay the balance of the loan if the money isn’t repaid.
The loan will be charged interest by the insurer. Howard explains that the interest rate will be determined by the policy contract, which is carrier-specific. Howard says that the interest rate is typically between 4% and 8% per year. He also states that policy loan rates do not change with market conditions. So don’t expect to get a deal just because general interest rates are low. The interest can be paid with the remaining cash value.
You can exchange it for an Annuity
You can swap your permanent insurance for annuity by using a 1035 exchange. This is a tax-free, tax-free transfer from one contract to another. This can increase retirement income. Let’s assume that the maximum payout stream from a cash-value insurance policy is $10,000 per year. Chapman states that converting to an annuity could generate $12,500. An annuity can also ensure that the payments last your whole life. However, you will have to cancel your life insurance policy. This cannot be reversed.
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Change to a new policy to pay for long-term care
You can convert your existing life insurance policy to include long-term coverage if you don’t already have one. Your life insurance can still be purchased, but a portion of the death benefit may be used to cover long-term care expenses.
Cash value can be an asset that will increase your chances of getting a loan or mortgage from the lender. The cash value can also be used as collateral for a loan. However, Chapman cautions that you should structure the deal carefully to avoid tax consequences. Before using cash value in this manner, consult an insurance professional.
It’s okay to leave it alone
Your cash value is yours to keep. The cash value can be left alone and will continue to grow, creating a greater inheritance for your heirs. Withdrawals and loans decrease the final death benefit.