Did you know that many people rely on life insurance while they’re living in addition to the death benefit proceeds? About 91% of life insurance owners say they bought it to “cover burial and other final expenses,” according to the 2018 LIMRA Insurance Barometer. Yet, nearly half admit that they hope to turn to their policy’s cash value for retirement income or to pay current home expenses. Source: NLG
This is primarily why permanent whole life insurance today is designed to be such an effective financial tool to use long before death.
For decades, whole life insurance has played a supporting role in the diversified portfolios of many retirement savers. Its cash values are guaranteed by the insurer, which offers conservative ballast to a portfolio that may also have riskier asset classes like stocks and bonds.
By itself, however, whole life insurance can also be a primary go-to during life’s unexpected challenges. Here are a few examples of how you could access some or all a policy’s death benefit, to help in a financial pinch:
LIVING BENEFITS
Generally, living benefits are no-additional-cost features that let you access all or part of your death benefit to help financially during a qualifying event. The unexpected can happen to anyone, like terminal, chronic, or critical illnesses or critical injuries. And living benefits are designed to help get you through such things.1
LOANS
Loans2 are usually available after the policy has been in-force for a while, typically one year. Although with whole life insurance it may be a few years before any significant cash value has been accumulated. The amount available to lend usually caps at the policy’s cash value. The loan is charged a minimum interest rate, say 5%, but it could go up based on movements in a standard credit benchmark. The good news is that you’re just paying yourself back, and if you keep up with your payments, your policy stays in-force.
Just as important, the cash value of a policy doesn’t always need to be accessed to be useful. That is, cash value in a whole life policy can serve as collateral for a personal, even a small-business loan.
WITHDRAWALS
Policy owners often can access a portion of cash value associated with paid-up insurance, or from dividends held at interest. Withdrawals don’t need to be paid back, that’s the good news. But there are many criteria to qualify for them, and they lower your death benefit as well as risk increasing your future premium payments to keep the policy active.
It is also important to distinguish between using a policy’s living benefits and surrendering it altogether. Your financial professional can help you sort out the differences, especially the impact that taking advantage of living benefits may have on your policy’s death benefit and your tax situation. Last, not all insurance types offer living benefits or build cash value. Be sure to check with a financial professional to learn more.
1Living benefits are provided by no-additional premium accelerated benefit riders. Payment of Accelerated Benefits will reduce the Cash Value and Death Benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event, may affect your eligibility for public assistance programs, and may reduce or eliminate other policy and rider benefits. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and with social service agencies concerning how receipt of such a payment will affect you. Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy. 2Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event.
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