Life insurance is a key component in any financial plan. Its death benefit creates an immediate estate for beneficiaries that will provide them with income, cash for college or other capital needs, and funds to pay taxes, funeral expenses, or administrative costs. It can pay off a mortgage or retire other debts.
In its simplest form, it pays cash when an insured individual dies, but did you know that a life insurance policy can be set up in such a way that it is beneficial during a policyholder’s lifetime?
Two Types of Life Insurance
Term life insurance pays a predetermined amount of money when a person dies. It is in force for a specified period (term) and may be renewed if needed. It provides a death benefit only.
Permanent life insurance, as the name implies, is set up to last a lifetime. Like term insurance, it too provides a death benefit, but that is where the similarity ends. Whole life insurance (the more common designation for permanent insurance) accumulates tax-sheltered cash values that can be accessed by the insured. Although not guaranteed, there may also be dividends that are similar to those paid to stock owners. Also, unlike the premiums on term insurance, which increase at the end of each term, the premiums for whole life remain level.
How Can the Accumulated Cash From a Life Insurance Policy Be Used?
The short answer is that it can be used for anything. After cash has accrued inside a whole life policy, it is available for withdrawal as a policy loan. While it is not a requirement to pay the loan back, any amount that is not repaid will be subtracted from the death benefit. That said, here are some creative ways in which others have used the living benefits of their whole life policies:
- Help with college tuition. If the cash value is large enough, all of the hassles of applying for bank loans or filling out financial aid forms can be eliminated. Using the money in your policy is probably preferable to tapping retirement savings or home equity, but it’s best to consult your agent to be sure.
- Start your own business. Starting a business may be your dream, but your bank may see it as their nightmare. If your savings and private borrowing from friends and family aren’t enough to get your venture moving forward, using your cash value might be sufficient to fill the gap.
- Take time off to attend to family matters. An untimely accident or illness to a family member may require you to take an unpaid leave of absence from your job. Aging parents are especially vulnerable and may need help for weeks or even months during their recovery. The accumulated cash in your whole life policy can replace lost income.
- Get funds to sustain you during a chronic illness. If you are chronically ill and unable to perform all of the activities of daily living, some permanent policies will allow you early access to your death benefit. If yours doesn’t, the accumulated cash value can still be used until you recover sufficiently. Whether you access your death benefit or cash value, the money taken out will reduce the amount your beneficiaries receive.
- Use your cash value to fund the early years of retirement. Your 401(k) and IRA can continue to grow tax-deferred if you live off your cash value early in retirement. The relative safety of your insurance money allows you to take on more risk and growth potential in your other sheltered accounts for several more years.
Finding the Life Insurance Policy That's Right for You
These examples are not appropriate for everyone. A professional insurance advisor from American Insuring Group can analyze your circumstances and help you find the term or whole life insurance policy that's right for you.
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