What to Do With the Cash Value From Permanent Life Insurance

iQuanti: The major benefit of a permanent life insurance policy is its ability to accrue cash value. But if you're considering taking out a permanent life insurance policy, you may be wondering what to do with that cash value. It turns out there are many ways you can use the cash value, including covering life insurance premiums and taking out a loan. Let's dive deeper into five ways you can take advantage of your permanent life insurance policy's cash value.

Cover life insurance premiums

When you reach a certain amount of cash value in a permanent life insurance policy, you can use that money to cover premiums in what's known in the industry as being "paid up." By asking your life insurance company to apply cash value toward premium payments, you'll continue having a policy that will pay a death benefit to beneficiaries if you pass, without having to pay premiums for several years.

Take out a loan

Taking a loan from your permanent life insurance policy is essentially borrowing money from yourself. That means as you pay back the loan and interest, it goes back into your account to re-build your cash value.

As with making a withdrawal, taking out a loan is going to decrease your death benefit. So, it's critical to discuss your intentions with your life insurance company to confirm the implications of taking out a loan before you commit.

Make a withdrawal

You can choose to withdraw a portion of your policy's cash value at any point. This means you have no intention of paying the money back, as you would if you take a loan against the policy. Taking regular withdrawals is sometimes a strategy of those using the cash value to supplement existing retirement income.

As you get older, a perk of taking withdrawals from a permanent life insurance policy is that withdrawing any premiums you've paid will be tax-free. You'll only need to start paying taxes once you dip into the investment gains. If this option seems appealing, it's important to discuss the repercussions of a withdrawal with your life insurance company. That's because a withdrawal may reduce the death benefit substantially.

Surrender the policy completely

Surrendering a permanent life insurance policy means you're closing it out and draining the cash value. This is an option for those who are no longer concerned about having a death benefit for their beneficiaries.

Before you decide if surrendering your policy makes sense, you'll want to check out the cost of surrender fees, as these can substantially eat into your cash value. Plus, be mindful that you'll need to count any investment gains received from the surrender as income and will be taxed accordingly.

Increase the policy's death benefit

Another option for using your cash value is putting it back into the policy to increase the death benefit. Using the cash value to increase the death benefit means beneficiaries will receive a larger payout upon the policyholder's death. If you have no other use for the policy than as a legacy for your heirs, increasing the death benefit can be a smart move.

The bottom line

There are many uses for the cash value from a permanent life insurance policy. A policyholder can choose to use the cash value to pay premiums, withdraw money, take out a loan, surrender the policy completely, or increase the death benefit. Whichever option you choose, it's smart to work with a financial professional before you make any changes or use the cash value of your permanent life insurance policy. That way, you'll fully understand the repercussions of making changes to your cash value.