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By Tim Maxwell
/ CBS News
Americans faced some challenging economic conditions last year, led by record inflation. And while it’s cooled in recent months inflation and an overall higher cost of living are still a concern.
Feeling the added pressure of inflation on their finances, some Americans may be looking for economic assistance and exploring their options, including tapping into their life insurance policies for cash. Understanding the advantages and disadvantages of this strategy can help you determine if getting cash out of your life insurance policy makes sense for you.
If you don’t have life insurance, or want to increase the amount you currently have, start by getting a free price quote now.
Depending on the type of insurance you carry and your circumstances, there are several ways to access cash from your life insurance.
If you have a permanent life insurance policy, you may be able to dip into your policy’s cash value account. Whole life, universal life and variable universal life are types of permanent life insurance policies that never expire and maintain cash value in addition to a death benefit.
By contrast, term life insurance is in effect for a limited term, such as 10, 20 or 30 years. The policy has a death benefit which pays beneficiaries if the policyholder passes away during the term. But one of the most significant differences between whole and term life insurance is that the latter policy does not have a cash value account, so there’s no cash for policyholders to access.
Taking money from your cash value account may make sense if you’re in a strong financial position and your beneficiaries will be taken care of after your death. On the other hand, if you have loved ones who rely on you financially, it’s probably not wise to pull away the financial safety net your life insurance provides.
Get a free price estimate today to see what life insurance protections you’re eligible for.
This option allows you to withdraw the entire cash value of your life insurance policy, which in turn surrenders your coverage. You’ll receive all the money you’ve paid towards your coverage and any interest you’ve earned. Your insurer also considers any unpaid loans or premiums on your account and you could also owe surrender fees and federal taxes.
Another potential option is to withdraw money from your policy’s cash value account tax-free up to the amount you’ve already paid towards your premiums. Any amount you withdraw that exceeds what you’ve already paid is taxable.
Your policy may allow you to take out a loan on the cash value of your insurance policy. Getting a loan from your insurance policy may be easier than through a bank or credit union because there is no credit check and more flexible repayment terms. But remember, any amount you owe on the loan’s outstanding principal and interest is deducted from the death benefit when you die.
If you need cash to cover your bills, you may have the option of drawing on your cash value account to cover the policy premium. This option can get you through a tough financial spot and keep your policy in force. Remember, if you end up depleting your cash value, your insurance could lapse, thus ending your coverage.
Weigh the advantages and disadvantages of getting cash from your life insurance to help you decide if it makes sense for you.
If you don’t want to use your life insurance for cash, consider these alternatives, which can get you the money you need without risking your coverage.
Whether you decide to get cash out from your life insurance policy or not, take steps to build an emergency fund that covers your living expenses for at least three to six months. A sufficient emergency fund can help cover a financial crisis without having to borrow money.
First published on September 8, 2022 / 8:11 AM
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