Cash value life insurance, such as a whole life policy, can provide a supplemental source of retirement income, or it can be accessed for other cash needs. There are generally two ways to access the cash surrender value in your life insurance policy: (1) surrender (cancel) your life insurance policy for cash, or (2) take a policy loan.
Surrendering Your Cash Value Life Insurance Policy
If you no longer need the amount of insurance protection you have, and you have a need for cash, surrendering your cash value life insurance policy may be a logical move. The cash value of a life insurance policy is the amount you are entitled to upon surrender of the policy. You may take the cash in a lump sum or as an annuity.
Keep in mind, if you surrender your policy, you have lost your insurance protection. Also, the surrender of your life insurance contract will produce taxable income to you to the extent that the cash surrender value exceeds the net premiums paid for the contract.
Borrowing from Your Cash Value Life Insurance Policy
You may also access your cash value by borrowing from it in the form of a policy loan. The amount that can be borrowed is the current cash value less any other outstanding policy loans. You must pay interest on the amount you borrow. The rate of interest may be stated in your insurance contract, or it may vary periodically based on a standard, such as corporate bond yields. Policy loans on older cash value policies may have lower guaranteed interest rates. During periods of high interest rates, these lower rates provide a low-cost, readily available source of credit. The main disadvantage of policy loans is that if you die with an outstanding policy loan, the death benefit proceeds paid to your beneficiary will be reduced by the amount of the loan.
SUGGESTION: Policy loans can be a valuable provision allowing you to borrow to meet temporary cash needs without surrendering your policy.
IMPORTANT NOTE: If you own a modified endowment contract, be aware that you may owe income tax on policy loans (up to the amount the policy has earned), as well as a 10% penalty on loans made before age 59½.