Life insurance is an asset to many people because of the multiple benefits that it provides. People often assume that life insurance policies only offer a death benefit. An often-overlooked part of life insurance policies is the cash value, which are funds you have access to while you are still alive. The cash value grows over the course of the policy. While you can withdraw your policy’s cash value, it’s important to check the terms of your policy. Make sure that you have a clear understanding of your cash value balance. If the policy’s cash value falls below a certain level, you may be forced to pay higher premiums.
The following are some ways in which you can use the cash value of your life insurance policy to your benefit.
Use It for Your Needs
Before you start making plans, remember that any growth in the cash value which is higher than the amount you pay in premiums is taxable once you withdraw it. To avoid paying taxes on this money, consider withdrawing only as much as is needed to handle your affairs each year. Think about the possibility of something unexpected happening in the future, such as incurring new debt. If you store some of the money in an emergency fund, you will be prepared if something unfortunate happens. Besides, you can use the rest of the money to assist with your retirement income.
Consider Getting an Annuity
The IRS gives you the option to exchange your life insurance policy for an annuity based on a 1035 exchange. Under the terms of a 1035 exchange, you can swap the contracts without any tax implications. Purchasing an annuity can increase your retirement income. It can also guarantee that you will receive consistent payments throughout your lifetime. However, you must remember that once you cancel your life insurance policy, you can’t go back and reverse this decision at a later date.
Take a Loan Against It
You have the option to receive the policy’s cash value in the form of a loan. You will not owe any taxes if you choose to withdraw this money as a loan and repay parts of it periodically. Any amount that remains to be repaid will be covered through your policy’s death benefit once you have passed away.
The insurance company may change the interest rate of the loan depending on the terms of the policy. In most cases, the loan interest rate is around 6%. You can use your remaining cash value to pay off the interest.
Take Care of Premiums
You can use the cash value of your policy to cover your life insurance premiums. This is a good idea if you are dealing with an emergency that has caused your income to drop.
Use It as a Collateral
You can use the cash value of your life insurance policy to get approved for a loan. In some situations, this cash value can be used as collateral. Before agreeing to the terms, consult with an adviser as the money may be subject to tax laws.
Let It Accumulate
You can choose to simply let the policy’s cash value accumulate, thus leaving a valuable inheritance for your loved ones.
Even if you believe that your coverage is no longer necessary, research the variables associated with cashing out your policy. There are multiple ways that you can use your life insurance policy’s cash value to secure your future. Looking for ways to buy the right life insurance policy? Talk to our team at Kneller Insurance Agency today to get started on your tailored coverage that can help your family through the toughest of times.
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