Secret source of instant cash? How whole life can save the day.

Imagine a financial safety net that not only protects your loved ones but also comes to your rescue in times of need – introducing the remarkable world of cash value life insurance (CLI).

There are a four ways to get cash out of a CLI policy: policy loans, collateral loans, cash withdrawals and collapsing the policy. Withdrawing the dollars is generally tax inefficient, and I would only advise you collapse a policy as an last resort.

Let's discuss how the loan programs typically work:

1. What kind of policy do I need?: There are two kinds of permanent policies that accumulate cash value: whole life and universal life (I discuss the differences here). Unlike term life insurance, which provides coverage for a specific period, permanent insurance provides coverage for the entire life of the insured individual.

2. How does the policy build cash value?: Over time, as the policyholder pays premiums, a portion of those payments goes into a cash value component. This cash value grows on a tax-deferred basis, and policyholders can borrow against it.

3. How do I get the cash out?: When the policyholder requires funds, they can apply for a policy loan or a collateral loan using the cash value of their whole life policy. Policy loans are provided by the insurance company, are contractually guaranteed and do not require a credit check. Collateral loans are usually provided by a third party, require a credit check and the loan is secured by the cash value.

4. What are the terms?: Once the lender approves the loan application, the policyholder can access a portion of the cash value as a loan. The amount available for borrowing depends on the policy's cash value and the insurance company's policies. The terms of the loan, including interest rate and repayment schedule are generally quite flexible, as discussed below.

5. How does the loan affect my policy?: The loan does not impact the overall death benefit of the policy. However, the outstanding loan amount, along with any accrued interest, will be deducted from the death benefit if the policyholder passes away before repaying the loan.

6. What are my repayment options?: Unlike traditional financing that comes with a strict repayment schedule, the policyholder has the flexibility to repay the loan and interest at their own pace. If they don't repay the loan during their lifetime, the outstanding amount will be subtracted from the death benefit when the policy pays out to beneficiaries.

7. Interest: The loan typically accumulates interest, which is often at a fixed rate determined by the lender. Unpaid interest will be added to the loan balance, increasing the overall amount that needs to be repaid.

8. What are the tax considerations?: Loans from a whole life policy are generally tax-free, as they are considered loans rather than income. However, specific tax implications can vary based on individual circumstances and local regulations, so it's advisable to consult a financial advisor or tax professional.

9. Why use my policy instead of conventional financing?: The policy loan program provides policyholders with a guaranteed source of easy access to funds without the need for credit checks or complex approval processes. Repayment is flexible and it can be especially useful in emergencies or when other financing options are limited. Collateral loans require credit checks, but because the policy is used as collateral, often carry lower interest rates than unsecured loans.

10. What are the risks?: While collateral loans can provide financial flexibility, it's important to manage them prudently to avoid negatively impacting the policy's cash value and death benefit. Working with a professional is best to ensure that the policy is properly structured to your needs. Unpaid loans can erode the policy's cash value over time and reduce its long-term benefits and as with any loan, interest rate changes will affect carry costs.

To learn more about how you can implement a cash value insurance solution for your family or business, book a time!