3 May 2012 0 Comments

Getting Cash From Whole Life Policies When You Want To Continue The Policy

Last time I discussed accessing the cash value of a Permanent life Insurance policy by discontinuing the policy.  Now, here are some ways to get cash from policies while continuing the policy in force. 

If you own any type of whole life policy the only way to access the cash value of the basic policy without surrendering the policy is through a policy loan.  If you borrow $10,000 from the policy’s cash value and the contract’s interest rate is 6% you will never have to repay the loan during your lifetime, but you will be charged $600 every year for interest.  If you don’t pay the interest it will be added to your loan, so next year your interest charge will rise since the loan will now be $10,600.  When you die the loan and any unpaid interest will be subtracted from the death benefit, so the loan is ultimately paid off at that time.

Very often an agent will request an “automatic premium loan” provision without explaining the downside.  When this option has been elected, if you don’t pay the premium when it is due, a policy loan will automatically be made in an amount sufficient to pay that premium.  The policy won’t lapse, but if you’re not aware that this is happening and the loan increases each year in order to pay the interest, the policy’s cash value will be cannibalized and the policy could ultimately self destruct.

If your policy does lapse with an outstanding loan you will not have to repay the loan, but you may have a tax bill.  When the policy lapses the total of all outstanding loans, plus any excess cash received will be considered as taxable to the extent that this sum exceeds the cost basis (total premium paid).  This can be devastating when there is little or no current net cash distributed and the taxable income is thousands of dollars.

If your Whole Life Policy has been using dividends to purchase paid up additions, instead of borrowing from the basic policy’s cash value, you could surrender units of this additional paid-up coverage.  This would not constitute a loan, but the reduction in death benefit would exceed the amount of cash received.  Don’t do this if you have developed an insurability problem.  Get some help from your agent.

Remember, if it is your desire to keep your policy in force, the cash value is part of the level premium structure and loans should not be treated as just a simple way to get your hands on some cash.  It could come home to bite you.

Next,  I’ll discuss how to access cash from Universal Life Policies without creating a policy loan.

Leave a Reply