When you are looking for money in a crisis, your life insurance policy may never think of you. You bought it to provide for your family when you're not there, but you're still here and looking for ways to pay your bills.
In some cases, a permanent life insurance policy, such as the whole life, could provide the necessary emergency cash. Taking money from your policy could increase your tax burden and you risk leaving your family short of funds if you die. But if you're in a financial constraint, touching the cash value of a whole life insurance policy could be a reasonable option.
Does your life insurance have a cash value?
Not all life insurance policies have hidden funds inside. To get money from your life insurance, it must be a permanent policy, like the whole life, that has taken the time to build a cash value.
Life insurance is not valid. It is typically the most convenient type of life insurance, but the main tradeoffs are that the lifespan lasts for a limited time and has no cash value. You cannot withdraw money from this type of policy.
Permanent life insurance often costs much more than long-term life, but part of the premium goes into an investment account that you may be able to touch. Whole life insurance, sometimes also called ordinary or simple life insurance, is the most common type of permanent policy. Other variations, such as universal life, variable universal life and indexed universal life, may also have a cash value.
»OTHER: the differences between the term and life insurance
If your policy is relatively new, it is unlikely to still have much cash value. Building cash value is like growing a savings account with small deposits over time. Typically you will have to pay the rewards for several years before there is enough cash value to be useful.
Also, keep in mind that the cash value of the policy can be much lower than the total of the premiums you paid or the amount of the insurance you purchased. If the cash value of your entire life policy grows undisturbed, it should eventually reach the death benefit of the policy, but this may not happen until you are 100 years old.
Four ways to take advantage of the life insurance cash value
If your policy has a cash value, you can touch it for anything you need, but taking money from the life insurance policy is a serious decision. The details differ from one policy to the other, so be sure to read the contract or check with your agent before acting. Here are four options to consider.
You can cancel your life insurance policy entirely and receive the surrender value, which is the cash value minus any commissions. If you choose this option, you will no longer be covered by the policy and your family will not receive a death benefit. Depending on how long you have the policy, you may pay a penalty for cashing in advance. And if your payment is higher than the premiums you paid, you may have to pay income tax for that profit. Giving up the policy may not be a good idea unless you are sure you no longer need life insurance to provide for your family after death.
Make a withdrawal
It is usually possible to withdraw part of the cash value in a full life policy without canceling the coverage. Instead, your heirs will receive a reduced death benefit when you die. Generally you don't owe any income tax for withdrawals up to the amount of premiums you paid in the policy. This option can also be called a partial cash redemption, as you are giving up part of the coverage.
Borrow from politics
Many policies allow you to borrow against cash value. Borrowing against a life insurance can be easier than getting a loan elsewhere because there is no credit check and flexible repayment schedule. When you take out a life insurance loan, you are generally expected to repay it with interest at some point. If you die before repaying everything, the amount you owe is deducted from the benefit paid to your heirs.
Cover your prize
If you need money to pay the bills and one of them is the life insurance premium itself, your cash value may come in handy. You may be able to skip paying instant premiums on your entire life insurance policy. Instead, you can use the cash value to cover the rewards for a while, keeping your policy safe while stormy.
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Lisa Green is a NerdWallet writer. Email: email@example.com. Twitter: @lisaccgreen.
The article How To Get Money From Your Life Insurance Policy originally appeared on NerdWallet.
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