What Can You Do with the Cash Value in Your Life Insurance Policy?

Most people think of life insurance as something their family receives after they are gone. But certain types of permanent life insurance, including whole life, universal life, and variable life, build something valuable while you are still alive: cash value. Over time, this living benefit can become a surprisingly flexible financial resource.

How Cash Value Works

When you pay premiums on a permanent life insurance policy, a portion of each payment goes toward the cost of coverage, and the rest accumulates in a tax-advantaged savings component known as cash value. It grows over time, either at a guaranteed rate (as with whole life), a variable rate tied to market performance (as with variable life), or somewhere in between. As it turns out, LIMRA reports that nearly 60% of permanent life insurance owners are unaware of how they can access or use their accumulated cash value. Let’s fix that.

Ways You Can Put Cash Value to Work

Here are some of the most practical ways policyholders use their cash value:

• College funding. You can borrow against your cash value to help pay for a child or grandchild's education. Unlike a traditional loan, you set your own repayment terms, and there is no credit check or application process.
• Supplemental retirement income. Withdrawals and policy loans taken in retirement can be structured to be income tax-free, making cash value a useful complement to a 401(k) or IRA, especially for high earners who have already maxed out traditional retirement accounts.
• Emergency fund alternative. Many policyholders use their cash value as a financial cushion during job loss, medical emergencies, or unexpected expenses, without the penalties that can come with early withdrawals from retirement accounts.
• Business opportunities. Some small business owners borrow from their policies to fund equipment purchases, bridge a cash flow gap, or even seed a new venture.
• Paying your own premiums. Once enough cash value has accumulated, many policies allow you to use it to cover your premium payments, which can be valuable during periods of financial hardship.

What to Keep in Mind

Accessing cash value is not without trade-offs. Outstanding loans reduce your death benefit if not repaid, and withdrawals can have tax implications depending on how they are structured. Variable life policies carry investment risk, meaning cash value is not guaranteed.

With permanent life insurance policies accounting for roughly 40% of all individual life insurance in force, it is important to work with a knowledgeable agent before making any moves.

If you would like to better understand how the cash value in your policy could work for you, contact our office today. We would be happy to walk through your options.