Accessing Money from a Whole Life Policy

by Wes Bridel on January 25, 2010

in Stewardship

Want access to your cash while you are still young?

Want access to your cash while you are still young?

Lately, a few people have asked how policy loans work when you have a whole life policy. We’ll address this in the next couple of posts.

There are two typical ways to access cash from your in-force whole life policy when you are still young.  There are other ways to get creative, and options that become more attractive when you are older, but we will focus on the two main ways your mutual life insurance company will offer that make sense while you are young.  Please remember that not all companies work exactly the same, but we will describe the way most of them work.

Two ways to access cash while you are young and healthy:

  1. Cash Value Withdrawal
  2. Policy Loans

Cash Value Withdrawal

A cash value withdrawal is equivalent to a partial surrender of your policy.  In most circumstances, this is not as ideal as a policy loan, however in others it can be the best solution.

The advantages to this method are the following:

  1. There is no cost to take this money out of your policy.
  2. If you are in a  period when high interest rates have just exploded upward, the short term cost of borrowing from your policy (if it is a variable rate loan company) might be much more than the current dividend level the policy is paying and therefore it might make sense to utilize a withdrawal so you don’t pay a high spread for the use of this money.

The disadvantages:

  1. When you remove this cash value, you reduce the amount of  paid up life insurance benefit that your cash value bought for you.  Thus your death benefit is permanently lower (it will still grow from where it is after the withdrawal, but will never catch up to what it would have been if you had not withdrawn the money unless you make additional purchases).
  2. With most companies, you cannot put this money back into the policy without additional underwriting (or converting an existing convertible term policy with this same company).
  3. So if your health has changed, or you simply don’t want to go through the hassle, you will have lost some of your death, cash value accumulation and other benefits permanently.
  4. The compounding affect of the dividends and cash value growth will be lessened by taking this money out.

Keep in mind that there might be Tax Implications, as well.  If the total amount you have withdrawn during the life of your policy including your current withdrawal is less than the total amount of premiums that you have paid into the policy, this is considered a withdrawal of basis and is not subject to tax.   Once you surpass the amount paid in, your withdrawals will be subject to tax.  (Many people choose to withdraw up to basis and then switch to policy loans to access the rest of their cash value and thus never pay taxes on the growth in the policy.  Again, depending on your situation, it might make more sense to use loans right away.)

This post is Part 1 in the series Accessing Whole Life Cash Value.  To continue with this series, click on Pt 2.

Photo credit: Herbert Harper

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