Managing Money In A Crisis
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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.
What's in this guide?
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.
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
The benefits of cash value life insurance
How does cash value work?
Every time you pay your premium, a portion goes toward the cost of your life insurance coverage, and a portion is typically invested to give your policy a cash value. That cash value grows on a tax-deferred basis, and earns interest at a fixed rate set by your insurer.
Once you’ve accumulated enough cash value, you can borrow against your policy. You won’t be taxed on your withdrawal, and the interest rates are typically low — making it a more appealing option than a conventional loan in some cases.
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 five to 15 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. Some permanent policies, like universal life, offer flexible premiums, but whole life doesn’t. 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 premium and look to other forms of financial assistance.
- Withdrawals might reduce the death benefit left to your beneficiaries. You’re entitled to take loans out against your policy. While you’re not 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.
- Call your insurer’s customer service number, or reach out to your local agent.
- Answer questions to verify your identity as the owner of the policy.
- Your insurer will ask you to fill out a form, indicating the amount or percentage of the cash value you’d like to access.
- 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 dip into any dividends you’ve earned.
Don’t have access to those funds? Your insurance company is legally required to give you a grace period to make up a missed premium payment. It typically lasts 30 or 31 days.
If you know you won’t be able to pay your premium within that timeframe, contact your life insurance company as soon as possible to explain your financial situation. Many state insurance departments have instructed insurers 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.
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.
By doing this, you’ll cancel your coverage, and you may have to pay taxes or surrender fees. Your beneficiaries won’t receive a death benefit, either — 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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