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How to use your whole life insurance policy during the coronavirus

If you’ve had your policy for a while, you may be able to treat the cash value as an emergency savings account.

Whole life insurance becomes a cash asset over time — and once you have enough cash in your account, you can dip into that fund. If you’re struggling to cover your bills and living expenses during the coronavirus, you may be able to rely on your whole life policy to help.

Can I use my whole life insurance policy to pay my bills?

Potentially. Like all permanent policies, whole life insurance builds cash value over time. When you’ve accumulated enough cash value, you can treat the cash value component of your policy as a flexible savings account — which means you can borrow from it whenever you need.

Many policyholders use their cash value to fund large purchases — but you’re also free to use it to cover basic living expenses, like your mortgage or other bills.

What is whole life insurance?

Can I use my whole life insurance policy to help my business?

Yes. The same principle applies here — if you have the cash value, you’re free to use it to cover business expenses.

The money could help you:

  • Pay employee salaries
  • Pay overhead expenses, like office rent, utilities and supplies
  • Inject cash flow into the business

How cash value works

Whole life insurance policies invest a portion of your premiums so your policy can build cash value over time, which accumulates on a tax-deferred basis. Once you’ve built up sufficient cash value, you can usually use that money to pay your premiums, or withdraw it to cover other costs like tuition or a mortgage. You’ll likely be able to withdraw a maximum amount of funds which adds up to the total value of the premiums paid.

Any money you can borrow against your policy will be charged interest. However, the interest rates are typically low, making it a more appealing option than a conventional loan in some cases.

Keep in mind…

With whole life insurance, the cash value doesn’t automatically roll into the total payout. Make sure you review your policy closely, because in many cases if you don’t use your cash value while you’re alive, you’ll lose it. If that’s the case, this may be an ideal time to tap into cash value.

Also remember you may have to pay taxes on loans or cash withdrawals. Check with a tax specialist or accountant to ensure you fulfill all of your tax obligations.

What should I know before using my cash value?

There are a few caveats to tapping into your cash value.

  • It can take several years to build up the cash value you need to start borrowing from your policy. Depending on your insurer and how much coverage you have, you might have to wait several years before you can tap into that money. So, if you’ve had your whole life policy for a while, you could use your cash value to pay your bills or help your business — but if it’s still growing, you’ll need to explore other options.
  • Your cash value may be less than your total premium payments. You may be surprised to find the total cash value you’ve accumulated could be less than the amount you’ve paid in premiums. That’s because your premiums are paying for the death benefit in addition to going towards the cash value. So if you’ve spent $30,000 in premium payments over five years, your accessible cash value might only be $20,000.
  • You must keep up your premium payments. To maintain your coverage — and access to your cash value — you’ll need to continue paying your premiums on time. If you need life insurance, prioritize paying your premiums and look to other forms of financial assistance for more help if necessary.
  • Withdrawals might reduce the death benefit left to your beneficiaries. In many cases you’re entitled to take loans out against your policy. While you may not be obligated to pay back those loans, if you don’t, your insurer will deduct the amount of the loan plus interest from your policy’s payout when you die. In short? Your beneficiaries may not receive as much money as you intended.

Because of these caveats, it’s a good idea to treat your whole life policy as an emergency savings account — and pay back any money you borrow as soon as you can.

How to access your cash value

You’ll need to contact your insurance company. The process will likely follow these basic steps:

  1. Call your insurer’s customer service number, or reach out to your local agent.
  2. Answer questions to verify your identity as the owner of the policy.
  3. Your insurer will ask you to fill out a form, indicating the amount or percentage of the cash value you’d like to access.
  4. Send back the form, along with any supporting documentation.

Once your insurer approves the cash value loan, they’ll transfer the funds for you to use however you wish.

What happens if I can’t pay my whole life premium?

You can use your cash value to pay your premium. If you’re with a mutual life insurance company, you can usually dip into any dividends you’ve earned to pay your premiums.

Don’t have access to those funds? Your insurance policy likely includes a grace period to make up a missed premium payment. Read through your policy carefully to see if it includes a grace period and how long it is.

If you know you won’t be able to pay your premium within that time frame, contact your life insurance company as soon as possible to explain your financial situation. Many insurers have developed emergency response plans to help policyholders dealing with financial hardship during the coronavirus. Your insurer may waive late fees or offer you a longer deadline or flexible payment plan.

What if I can’t pay my life insurance premiums because of COVID-19?

When to surrender your whole life policy instead

As a permanent policyholder, you can withdraw money or take out a loan against your policy. But in some cases, it might make sense to surrender your policy and collect the cash.

You could consider surrendering your policy if you need liquid cash and:

  • You no longer want or need life insurance
  • You’re healthy and not in a high-risk group for COVID-19
  • You’ve built up enough cash value to cover your bills and other living expenses.

When you cancel your coverage you may be on the hook to pay taxes or surrender fees. Bear in mind that without an active life insurance policy, your beneficiaries won’t receive a death benefit when you die — so carefully weigh your options before going ahead with a policy surrender.

Bottom line

Your whole life insurance policy can be a financial lifeline in times of hardship. But you’ll need to meet certain criteria before you can borrow against your policy, and you run the risk of denying your beneficiaries a death benefit.

If you’re struggling to cover your bills during the coronavirus, read the fine print of your life insurance policy to explore your options.
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