Cash Value Policy Loans & Withdrawals.
How does an insured get the money out of a cash value from a life insurance policy? There are several ways to withdraw cash value from a life insurance policy.
Money from a cash value life insurance policy can be borrowed. In this case, interest will continue to be credited to the account as if the full amount still remained. Borrowing cash value can allow you to access funds tax-free.
It is important to note, though, that while the money is not required to be repaid, interest will typically still accrue on the unpaid balance. And, if the insured should die before the loan has been repaid, the insurance company will retain the difference from the death benefit that is paid out to the beneficiary.
Some life insurance companies offer two types of cash value loan options. You will find these two options mostly in IUL policies.
- Index Loans – (Also known as participating loans) these types of cash value loans charge a certain % (typically 5%) on your loaned out money, but they allow your loaned out money to still participate in the index upside. So if the year over year index credit was a 12% return. Your cash value would get credited the difference in the spread (net 7%) on cash value that is loaned out. In positive years this can be a very powerful compounding feature.
- Fixed Loans – fixed loans after a certain number of years (typically 10) can be zero percent interest loans in an IUL policy with most insurance companies. Your agent will be able to tell you which companies offer a zero perfect fixed loan.
Cash value withdrawals can be made from a permanent life insurance policy. In this case, any amount of the withdrawal that is more than the amount of the premium paid in will be taxed to the policyholder.
Surrender the policy
There is also the option of surrendering a life insurance policy. In this case, the policy will be canceled, and the cash value paid out. If the amount of cash exceeds the amount of paid-in premium, the overage will be taxable.
Cash Value Life Insurance vs. Term Insurance
Term life insurance policies are pure death benefit life insurance policies. Permanent policies are the only types of life insurance with cash value. So there is no cash value in a term life insurance policy which makes this form of coverage much cheaper. Term policies also have an expiration date, unlike cash value policies like whole life and universal life.
What Happens to the Cash Value when you Die?
This depends on what type of policy you have and what death benefit you opted for. There are two types of death benefits. Level and increasing. If you have an increasing death benefit the policy could pay out the death benefit and the majority of the premium paid in which would basically include the cash value being paid out on top of the death benefit.
If you have a whole life policy and you added paid-up additions rider then you could also get have a death benefit that increases over time.