Cash From Your Life Insurance
If you bought a whole-life insurance policy when your kids were still in pull-up pants, you’ve probably built up a sizable stash of cash. And if you’re heading into retirement with a decimated investment portfolio, a mortgage and increased medical expenses, that cash in your policy may be more useful now than later — especially if your loved ones don’t need the death benefit after you’re gone.
To get at the cash, your options include partial withdrawals, policy loans, cashing in the policy and letting it lapse, trading your policy for an annuity or long-term-care policy, or selling your policy to a life-settlement company. A permanent life insurance policy “is like a Swiss army knife,” says Dave Simbro, senior vice-president for Northwestern Mutual. “There are all these things you can pull out.”
Before you decide which tool to use, consider the tax ramifications; withdrawals on gains, beyond what you’ve paid in premiums, are taxable. And if you’re thinking of surrendering or selling the policy, be careful. Don’t underestimate the need to provide for your spouse, says Mary Beth Hofmeister, a certified financial planner in Albany, N.Y. When one spouse dies, the survivor typically receives only the larger of the couple’s two Social Security benefit payments, and pension payments and retiree medical benefits may also shrink. Plus, if you’ve owned the policy for a long time, it’s probably earning a better return than you could get on your own without taking a lot of risk, says Michael Kitces, a certified financial planner in Columbia, Md. “We still see a lot of policies that have returns ranging from 3% to 6%,” he says.
Tap the cash value
A permanent life insurance policy has two components: the face value, or the amount that will be paid to your beneficiaries when you die, and the cash value — a savings account that’s funded by a portion of your premiums. With whole life and universal life, the insurance company usually promises that a minimum level of interest, after insurance costs and expenses are deducted, will be credited to your account every year. You may earn more if its investments perform well. With variable universal life policies, you choose the investments and may not get a guarantee. With any kind of policy, if you surrender it, you’ll receive the balance in the cash-value account, minus any loans or unpaid premiums.
If you’ve owned your policy long enough to have a good-size cash-value account, you have several options. If you’re still paying premiums, you can use the funds in the account to pay them. If you need cash but don’t want to surrender your policy, you can withdraw your basis – the amount in the cash-value account you have paid in premiums — tax-free. That’s the simplest option. Withdrawals that exceed that amount — your gains — will be taxed at your ordinary income rate. The death benefit will be reduced by the total amount you withdraw.
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