Getting life insurance to work for your life
A life insurance policy can do more for you and your loved ones than just protect you in the event of death or dismemberment. Did you know that certain policies have a cash value or can be used as collateral? If you currently hold a life insurance policy with a cash value component such as a Universal or Permanent life policy, you may be able to leverage your policy for a cash value or as collateral on a loan. The tax consequences vary depending on how you use the funds and each method has advantages and disadvantages.
Using Your Life Insurance Policy as Collateral
A life insurance policy is an asset that can be used as security on a loan. Generally, the lender will require that the insurance policy be pledged as collateral for the loan. In the event that the borrower dies, the loan is repaid using the proceeds from the insurance policy as well as with any other assets or collateral.
Depending on the type of life insurance policy you hold, you may be able to accumulate a cash value within the policy which grows as payments are made into the policy (in excess of the insurance premium). If your policy does have a cash value, it may be enough to provide for security on a loan. Some lenders will grant loans based on between 75% and 90% of the policy’s cash value. You may even be able to reap the tax benefits of using your cash value as security on a loan. The interest charges on the loan as well as a portion of the insurance premiums may be tax deductible.
If you decide to use your policy as security for a loan, you may receive better access to your cash values than you would with a policy loan or withdrawal. This method does however involve greater risk and a lot more paperwork. Here are some highlights of what is involved with using your policy as collateral:
- The life insurance policy is collaterally assigned to a third-party lending institution as security for a line of credit or term loan
- Assigning the policy to establish a line of credit or loan does not result in any taxable income to you
- Interest is usually payable on the outstanding balance of the loan, although in some cases it may be capitalized
- If the life insured dies, the lender receives repayment of the loan and any outstanding interest from the policy benefit first, and the beneficiary of the policy receives any balance of the policy benefit
Using your life insurance policy as collateral for a line of credit or loan is a complex and intricate process which requires expert guidance and knowledge. ShaCole has the expertise and experience that can guide you through this process as can explain the benefits and legalities associated with it.
Using the Cash Value of your Life Insurance Policy
It is possible to withdraw the cash value of your life insurance policy to cover financial needs if you have accumulated extra value through additional policy payments and premium growth. The primary reason for buying a life insurance policy is to have the funds available to pay final expenses and to help to ensure your family’s financial future upon death. Many life insurance policies have the additional benefit of accumulating a cash value. The cash value that builds is only taxable when it’s withdrawn however the cash value can provide liquid cash when there is a shortfall.
Surrendering all or part of the cash value of your policy essentially reduces the cash value left in the policy and can also affect the death benefit payable as well as policy growth. The percentage taxable is the same whether you surrender all or part of the policy, the tax rate being 80% of the total surrendered.