Options for Cash Value Life Insurance Before Retirement

Retirement
A happy couple plays on a swingset in a park in the fall: cash value

Permanent life insurance may provide you and your loved ones lifelong financial protection against the uncertainties of life. While the death benefit is one of the most important aspects of life insurance, permanent policies also offer other benefits that could be helpful to those who may be years away from retirement, including cash value. With policies that include cash value, such as whole life or universal life, part of your premium goes into an account you can access whenever you want. (This is unlike term life insurance, which has no cash buildup — although it may generally cost less than permanent life insurance.)

If you hold on to your policy long enough, you could end up with more funds than you paid into the account. However, unless you make payments on your policy for an extended period or pay a significant amount, your cash value will likely be less than your premium payment. It's important to note that loans or withdrawals may generate an income tax liability, reduce the account value and cause the policy to lapse. Timely premium payments and sufficient account value are necessary to cover insurance costs and charges.

A Foundation for Tomorrow

Cash value could help you reach your financial goals. Whenever you need money, you could contact your insurance company and request a withdrawal from your cash value. If a loan value is sufficient, you could use these funds for things like buying a new car, making a down payment on a home or paying for a wedding.

These withdrawals, however, would reduce the size of the death benefit. They may also generate an income tax liability and cause the policy to lapse. Punctual premium payments and sufficient account value are necessary to cover insurance costs and charges. What are some other reasons you may want to leave your cash value alone? If you would like the maximum death benefit for your beneficiaries, if you would like to have a retirement income (as an alternative to the death benefit) — or if you would simply like to avoid the consequences of withdrawals.

You could also consider accessing your cash value as a loan rather than as a withdrawal. This way you could repay the loan if you would like to in the future. This option would keep it growing for the future, which could help provide more money for other goals. Loans accrue interest and reduce the account value and death benefit. They may also cause the policy to lapse.

The Uncertainties of Life

Your life insurance cash value may also help if you ever need a backup for your emergency fund. For example, if your car breaks down or your house needs emergency repairs, the funds from your life insurance could help pay for some of these costs. The policy loan will still incur interest, but this may be a good alternative to using credit cards or borrowing from loved ones, depending on your unique situation.

According to a 2017 GOBankingRates survey, 57 percent of Americans have less than $1,000 in savings and are not prepared to handle a financial emergency. With cash value, you could have something to fall back on in an emergency. You could also use your cash value (if sufficient) to pay your life insurance premiums on a temporary basis. You could ask your life insurance company to deduct the cost of premium payments from your balance. This happens automatically with universal life insurance. With whole life insurance, however, you would surrender paid-up insurance to pay premiums. This option could let you temporarily free up some money in your monthly budget while maintaining your permanent life insurance policy.

When you set this up, ask your financial representative whether your cash value will ever run out. Depending on the size of your premium and your total cash value, you could spend down all of your cash value with this option. At this point, you would need to start making payments again, or you would lose your life insurance coverage. And because this approach drains down your cash value, there will be less available for other uses.

Options for Peace of Mind

Over time, you could benefit from more life insurance coverage. For instance, if you have a child (or another child), get married, buy a house or enter retirement. In this case, you could use your cash value to increase the size of your death benefit. Your policy may allow you to make paid-up additions, which would put your cash value earnings toward buying more life insurance.

If that's not enough, ask your financial representative what options are available for using your cash value to buy more coverage. You could withdraw the funds to pay for another policy or convert your existing plan to another one with less cash value but a more substantial death benefit. These options may result in more underwriting and the need for further approval.

If you don't need your cash value today, you could just keep saving for the future. Your balance will keep growing as you pay your premiums and the insurance company invests your funds. You'll have one more pool of money waiting for you at retirement — and if you don't spend everything yourself — your loved ones could also receive a more significant inheritance.

Considering Cash Value

It takes time to build cash value. With universal life insurance, your policy must be funded for a significant period (or even overfunded relative to the premium) before cash value is available. With whole life insurance, cash value will also only be available after an extended period or if you increased funding through paid-up additions.

Before you take cash value out of your life insurance policy, consider how it will impact your future coverage. For universal life, one of the primary goals is to build cash value to prepare when your insurance charges increase in the future. If you take money out, it could be helpful to make sure enough remains for future premiums.

For whole life insurance, loan interest accrues when you borrow cash value. If this interest is not repaid, the policy could eventually lapse. Review the long-term impact with your financial representative before deciding where your journey will take you.

Life insurance cash value may help give you long-term peace of mind. Your premiums will slowly and steadily build in your account and, before you know it, could open up all kinds of valuable opportunities.

IMPORTANT DISCLOSURES
Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.

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