6 Ways to Capture the Cash Value in Life Insurance
Strategy 1: Boost the Death Benefit
If you have accumulated sizable cash value over the life of your permanent life insurance policy and do not intend to use these funds yourself, you may choose to leave a larger death benefit to your beneficiaries.
How can you pull that off? It’s usually very simple. Just call your life insurance company and say you’re interested in making a trade: You’d like to increase the death benefit in exchange for the cash value on your policy. Because the company doesn’t want to lose your business, it will more than likely accept your request.
During the trade, your objective should be to completely drain the cash value and transfer the full amount over to the death benefit or the face value. For example, if you have a universal life insurance policy with a $200,000 death benefit and $100,000 in cash value, your goal is to completely empty the cash value and boost the death benefit to $300,000. That’s $100,000 more that will fall into your heirs' hands instead of going to the life insurance company.
Strategy 2: Pay Life Insurance Premiums
Once you have accumulated enough cash value, you can tap into it to cover premium payments. This is known as being “paid up.” The vast majority of life insurance companies are willing to honor this request—all you have to do is ask. Using this tactic, you could save $2,000 or more in premiums each year.
Strategy 3: Take Out a Loan/Collateral Loan
If you’ve built up a sizable cash value, you may also choose to take out a loan against your policy. Life insurance companies often offer these cash-value loans at interest rates lower than a traditional bank loan.
Of course, you’re not obligated to pay back the loan since you’re essentially borrowing your own money. However, it’s important to note that any money you borrow, plus interest, will be deducted from the death benefit when you die.
Strategy 4: Make a Withdrawal
If you’re low on funds or simply want to make a large purchase, you have the option to withdraw some or all of your cash value. Depending on your policy and the size of your cash value, such a withdrawal could chip away at your death benefit or even wipe it out altogether.
While some policies are reduced on a dollar-for-dollar basis with each withdrawal, others (such as some traditional whole life policies) actually reduce the death benefit by an amount greater than what you withdraw. Be sure to discuss this tactic with your insurance agent before you make any sudden moves.
Strategy 5: Grow Your Nest Egg
In recent years, cash-value life insurance policies have become extremely popular with investors looking to supplement their retirement income. If you have accumulated healthy cash value, you can use these funds in a variety of ways as an asset in your retirement portfolio. Often these funds are guaranteed to grow tax-deferred for many years, which could really beef up your nest egg.
Most advisors say policyholders should give their policy at least 10 to 15 years to grow before tapping into cash value for retirement income. Talk to your life insurance agent or financial advisor about whether this tactic is right for your situation.
Strategy 6: Full Surrender
Of course, you always have the option to surrender your policy and receive the accrued cash value. Before taking this route, it’s important to consider many factors. First and foremost, you’re relinquishing the death benefit when you surrender a life insurance policy, which means your heirs will receive nothing from the policy when you die. In most cases, you’ll also be charged surrender fees, which could greatly reduce your cash value.
Additionally, the cash you receive through the surrender is subject to income tax. If you have an outstanding loan balance against the policy, you could incur even more taxes.
Source: Investopedia