If you have life insurance you may be able to use it to get emergency cash amid the coronavirus crisis
When you’re looking for cash in a crisis, your life insurance policy might never cross your mind. You bought it to support your family while you were away, but you’re still around and looking for ways to pay your bills.
In some cases, a permanent life insurance policy, such as whole life, can provide the emergency cash you need. Withdrawing money from your policy could increase your tax burden and you risk leaving your family strapped for funds if you die. But if you’re in dire financial straits, tapping into the cash value of a whole life insurance policy might be a reasonable option.
Does your life insurance have cash value?
Not all life insurance policies contain funds. To withdraw money from your life insurance, it must be a permanent policy, like whole life, that has had time to create cash value.
Term life insurance is not eligible. This is usually the most affordable type of life insurance, but the main tradeoffs are that the term life lasts for a limited time and has no cash value. You cannot withdraw money from this type of policy.
Permanent life insurance often costs a lot more than term life, but part of the premium goes into an investment account that you may be able to operate. Whole life insurance, sometimes referred to as regular or simple life insurance, is the most common type of permanent policy. Other variations, such as universal life, variable universal life, and indexed universal life, may also have cash value.
If your policy is relatively new, it is unlikely that it will still have much cash value. Building cash value is like growing a savings account with small deposits over time. You will usually have to pay premiums for several years before you have enough cash value to be useful.
Also be aware that the cash value of your policy may be much less than the total premiums you paid or the amount of insurance you purchased. If the cash value of your whole life insurance policy increases undisturbed, it should eventually reach the policy’s death benefit, but this may not happen until age 100.
Four ways to harness the cash value of life insurance
If your policy has cash value, you can use it for anything you need, but taking money out of your life insurance policy is a serious decision. Details differ from policy to policy, so be sure to read your contract or check with your agent before acting. Here are four options to consider.
Abandon the police
You can cancel your life insurance policy entirely and receive the cash value, which is the cash value less any fees. If you choose this option, you will no longer be covered by the policy and your family will not receive a death benefit upon your death. Depending on the length of your contract, you might pay a penalty for having cashed out earlier. And if your payment is more than the premiums you paid, you may have to pay tax on that gain. Buying your policy may not be a good idea unless you are sure you no longer need life insurance to support your family after you die.
Make a withdrawal
You can usually withdraw some of the cash value from a whole life insurance policy without canceling coverage. Instead, your heirs will receive a reduced death benefit upon your death. Generally, you will not owe income tax on withdrawals up to the amount of the premiums you paid to the policy. This option can also be called a partial cash surrender, since you are giving up some of your coverage.
Borrow from the police
Many policies allow you to borrow against the cash value. Borrow against life insurance may be easier than getting a loan elsewhere because there is no credit check and a flexible repayment schedule. When you take out a life insurance loan, you are usually expected to pay it off with interest at some point. If you die before repaying everything, the amount you owe is deducted from the benefit paid to your heirs.
Cover your premium
If you need money to pay your bills, and one of those bills is the life insurance premium itself, your cash value may be of use to you. You may be able to avoid making premium payments on your whole life policy. Instead, you can use the cash value to cover your premiums for a period of time, keeping your policy safe while you weather a financial storm.
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Lisa Green is a writer at NerdWallet. Email: [email protected] Twitter: @lisaccgreen.