“The best things in life are free, but you can give them to the birds and the bees. I need money; that’s what i want!”-money (that’s what i want), written by berry gordy and janie bradford.
For over 50 years, people have been singing along with the choir, “I need money, that’s what I want!” And for those with whole life insurance policies, there are several ways for policyholders to get “big money” when they need it. For an overview of how to use life insurance to get cash when needed (a strategy not lost on the top 1%), read on. For a deep dive exploring the financial secrets of the 1%, sign up for our free “Amazing Secrets of the 1% Rulebook” webinar.
Reading: How to live off life insurance
how to use life insurance to get cash when you need it
1. redeem your policy for its cash value.
Once seen as the “only” option if a policy was no longer wanted, necessary or affordable, many policyholders still take this option simply because they don’t understand the other options available to them. this is usually not the option we recommend, as you will forfeit all policy benefits along with your policy… plus you may be defrauding yourself.
2. sell your life insurance policy for cash
As we’ve discussed in our life settlement posts, one way to get cash when you need it is to sell your policy and rights to your death benefit. this option has only been widely available in the last few decades and its popularity is increasing. Selling a policy can work well for people who are very old and/or have serious health problems, increasing the likelihood that there will be willing buyers. but what if you are 50 years old and you compete in marathons?
3. withdraw the cash value of a whole life insurance policy
If you’re withdrawing below your “basis” (the amount you paid into your policy), you can withdraw some (or even all) of your cash value without penalty or tax. You also don’t have to pay back what you withdraw, since it was your money to begin with. This may be a preferable option to a home equity loan or a loan from your 401(k) or IRA, as there are no penalties, taxes, or qualification procedures. however, its cash value stops growing if you withdraw it, so you may prefer the following option if you’re considering how to use life insurance to access cash
4. borrow against the full insurance cash value
People typically borrow against their cash value by going directly to the life insurance company to get the loan. Since the cash value is collateral and is held by the business, this too is quick and hassle-free (no credit checks, pay stubs, or approval process). If the rates at your bank are better, you may be able to borrow from your bank, still using your cash value as collateral. (ask your banker or explore potential sources here).
People and even financial advisors often talk about “borrowing its cash value.” but that is a misleading and inaccurate phrase. you’re not actually borrowing the cash value itself (nor are you paying yourself interest, despite what you’ve been told). if you’re borrowing from your insurance company, you’re leveraging its cash value by borrowing against it.
5. borrow against your death benefit
In some situations, you may be able to take advantage of your policy to obtain a loan from a bank or private individual, using your death benefit as collateral. As discussed in #1 (selling your policy), this will not be an option unless you are in your 80s or 90s. but depending on your situation, it might make more sense than selling your policy. And if you need the money for medical care, maybe you’re battling cancer or another serious illness, find out if your policy provides the following benefit…
6. receive an accelerated death benefit
Whether or not you have this option available will depend on the options and riders you chose when purchasing your policy. To obtain an insurance policy review, contact your life insurance company. they will be able to tell you if an accelerated death benefit is available to you. If you do, you may be able to receive a portion of the face value of the policy (the full value, including the death benefit) by showing you have a qualifying diagnosis or condition.
7. annualize your policy
Unlike policy-backed loans, this is a non-revocable option that should be used only later in life with the guidance of a professional. most insurance companies offer this option. Like a reverse mortgage, this option will allow your policy to start paying you. You would select a time period, such as 10 or 20 years, life expectancy, or life plus a certain amount for the beneficiaries. you would receive a specific amount of income each month during that time period.
8. get your dividends in cash
If you’re just looking for “a little extra cash” to make the difference between surviving and thriving, this may be your ticket. Typically, everything from a dividend-paying whole life insurance policy is used to purchase paid-up additions, but instead, they can be received in cash tax-free up to your basis.
9. establish a remaining charitable trust with your policy
Finally, when considering how to use life insurance to access cash, don’t overlook the option of remaining charitable trusts. Such trusts can be used to sell a highly appreciated asset (such as real estate, stock, or a business) in a way that reduces capital gains taxes and also benefits the charity. It’s also a way for the person donating the policy to earn an income stream, which comes from the charity investing the money from the asset.
for more information on this and other options, consult my book, live your life insurance. You can get a print copy from amazon or buy it in digital downloadable ebook or audio format at prospersthinkers.com.
Just want to eliminate your premium payments? if you’ve had your policy for a while, that might be possible, keeping your policy. read “stop your premium payments…and keep your whole life policy!” for more information.
Need help understanding your policy and your options? we can help! For a limited time, we’re offering a no-cost, no-obligation life insurance policy review. Whether you’re considering using your policy for cash and want to weigh your options, or just want to understand the benefits of your policy, we’d love to talk with you.