Your Life Insurance Policy Presents Many Options If You’re Short on Cash

By Shane Flait ©2009

If you’re in need of cash or running short on income, you can turn to your permanent life insurance policy to help you out. Your policy carries both a cash value and provides a death benefit at your death. Both these attributes give it value you can extract for yourself. This article shows a variety of ways your policy can solve your cash needs.

First, the principal reason for buying life insurance on yourself is to supply cash - in the form of a death benefit – for some purpose after you die. That purpose may be to supply income for your spouse and dependents, a legacy, or to cover estate taxes. Over time, circumstances change so the amount of insurance needed changes – if needed at all.

Generally, life insurance is a poor investment vehicle. That’s because its fees and expenses are tailored to supply a death benefit at your death for the purpose you bought it.

Just to remind you, a life insurance policy is a state-regulated investment. Earnings within the policy from the premiums you paid grow tax-deferred. If you die, the death benefit – i.e. face value of the policy – goes to the beneficiary free of income tax. If you cash in the policy, you’re liable for any income tax on the earnings beyond your return of premiums.

With that said, I’ll list the options you can consider to address your cash concerns based on whether or not you need to maintain some amount of life insurance or not.

Options if you need cash but also need some life insurance coverage:

If you’re having trouble paying the premiums:

• Ask your insurance company to convert it to a paid up version of lower death benefit
• Trade in your policy for a new one of lower premiums

If you need a lump of cash that you can probably repay later:

• Take a loan from your cash value

Options if you need cash but no longer want life insurance coverage:

If you don’t need the policy any more, consider:

• Surrendering you policy to your insurance company for its surrender value
• Selling your policy in a life settlement arrangement

If you’re terminally ill consider:

• Selling your policy in a viatical arrangement.

Comments on each of these options

Above all, don’t simply stop paying your premiums so your policy will lapse. Begin with calling your agent to see what way your company can help you out. See if it can convert your policy to a paid up version.

You can exchange to another policy without paying tax on the investment gains earned on your original contract through a ‘1035 exchange’ – approved by the IRS.

Taking a loan requires that you’ve accumulated some cash value in your policy. Your loan proceeds are not subject to income tax.  Of course, your death benefit – should you die before paying it back – will be reduced by what you still owe on the loan.

Also check on what your insurance company will give you for a surrender value. These have traditionally been rather small. But find out what it’ll give you so you can compare it to making a ‘life settlement’ arrangement.

Life settlement companies will pay you cash to take over ownership of your policy including making any remaining premium payments in return for receiving the death benefit when you die. They’ll pay you based on your health records and what they judge to be your remaining life expectancy. The longer they expect to wait for your death, the lower they’ll pay. But you generally need to be at least 65 to qualify.

Viaticals are similar to life settlements but address those who are diagnosed as terminally ill with generally less than two years to live. Because of your urgent need of cash, some states license viaticals a bit differently than they do life settlements; but other states don’t.

Check with your settlement or viatical broker to understand what provisions are required in your state.

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com