If you're thinking about accessing some of the cash in your permanent* life insurance policy, there are a few things you should know.
One of the benefits of owning a permanent life insurance policy is the cash value that can accumulate. With life insurance such as whole life, universal life insurance, or variable universal life, a portion of your premium is credited to the policy's cash value and can be used while you're alive and in a variety of different ways.
- Take out a policy loan that borrows against your policy's cash value when you need money.
- Adjust your premiums (within the limits of your contract).
- Let the cash value grow and use it to supplement your income in retirement.
What you should know about policy loans
Unlike a conventional loan from a bank or credit union, you don't have to pay back a life insurance policy loan. But keep in mind that as long as your policy is in force, the loan interest will continue to build and be added to the loan balance.
It's important to note that the money you borrow and don't pay back (including the interest accrued) will be deducted from your death benefit when you die, which means your beneficiary(s) will receive less. For example, let's say that you have a $250,000 policy and take out a $10,000 loan. If you died before making any loan payments, your beneficiary(s) would receive $250,000 less $10,000 (plus any accumulated interest).
As the cash value builds in your policy, it accumulates tax-deferred. However, the loan amount could be taxed if you were to surrender or lapse the policy before you finish paying it back. The taxable portion would be the difference between the loan amount and the total amount of premiums you have paid into the policy.
The bottom line
The purpose of a permanent life insurance policy is to provide your family with financial security when you die. Being able to take a loan against the cash value that accumulates in your policy can provide you with additional benefits while you're still living. But if you're thinking about a policy loan, be sure to get the facts and understand how they work.
Before taking out a policy loan, meet with your insurance agent or financial professional. He or she can run what's called an "in-force illustration” that shows the impact a loan will have on your policy over the years. And once your policy loan is active, make a calendar note to have your agent provide you with an illustration on an annual basis. By monitoring your policy loan every year, you can better manage your life insurance policy and loan.
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*As long as required premium payments are timely made