Whole life insurance is a popular lifetime life insurance policy that can accrue cash value as it seasons. But before you cash it out, make sure you ask these important whole life insurance questions.
What is the cash value and can it differ from the face amount?
There are two things about whole life insurance that may seem to be confusing: face amount and cash value. According to The Nest, face value is the actual amount of coverage that you elect to be paid out to the beneficiaries upon your passing. But the cash value differs, and is the value that builds up in the policy as you pay into it. Later on, this cash value can be borrowed against or even cashed out before your policy expires. So if you pass away, the face amount is paid to your beneficiaries. Whereas if you cash out, you only receive the cash value of what you've paid in.
Can I cash out my policy for its cash value?
The simple answer here is that in most cases, yes, you can cash out your policy, explains Investopedia. When most policies are cashed out, or surrendered, the owner is usually paid out a certain cash sum. This can be lowered if you have a loan out against the cash value or have premiums that you have not yet paid.
Can I borrow from the policy's value?
In most cases, yes, you can borrow against the value of a whole life insurance policy. But Zacks warns that there can be a waiting period and that interest may be charged and assessed against the cash value from your loan. What's more, any funds owed are deducted from due benefits upon your passing.
Are there any tax implications?
We'll let the IRS answer this question. They say that, "Generally, if you receive the proceeds under a life insurance contract as a beneficiary due to the death of the insured person, the benefits are not includable in gross income and do not have to be reported." However, they also add that, "Any interest you receive is taxable and you should report it just like any other interest received."
If you are considering a life insurance policy, make sure you spend ample time researching and comparing your options. Also, reach out to your existing vehicle or home insurance agent first, as you may find that there are certain discounts available to you for being a present policy holder.