If you’ve heard it once, you’ve heard it a million times: Life insurance is a must-have, especially when you have a family that depends on your income. If you die unexpectedly, a life insurance plan will ensure all of your family’s financial needs will be covered – from the monthly mortgageto grocery bills to your child’s college education.
While income replacement is the primary purpose of life insurance, many policyholders tap into cash-value life insurance for other reasons, such as building up a nest egg for retirement. Also known as permanent life insurance, cash-value life insurance policies provide both a death benefit and a cash-value accumulation during the policyholder’s lifetime. See How Cash Value Builds In A Life Insurance Policy to read more about how this works.
With cash-value policies, policyholders can use the cash value in a variety of ways, including as:
- A tax-sheltered investment;
- A means to pay policy premiums later in life; and
- A benefit they can pass on to their heirs.
Whole life, variable life and universal life all have built-in cash value. Term life does not.
Don’t Throw Away Your Cash Value
Far too many policyholders make the costly mistake of leaving behind a wad of cash value in their permanent life policies. When the policyholder dies, his or her beneficiaries receive the death benefit, and any remaining cash value goes back to the insurance company. In other words, they’re essentially throwing away that accumulated cash value.
Fortunately, you can take steps to ensure you don’t trash your cash value. Here are six popular strategies to help you make the most of the cash value in your permanent life insurance:
Strategy 1: Boost the Death Benefit
If you have accumulated a sizable cash value over the life of your permanent life insurance policy and do not intend to use these funds yourself, you may choose to leave a larger death benefit to your beneficiaries. How can you pull that off? It’s usually very simple. Just call your life insurance company and say that you’re interested in making a trade: You’d like to increase the death benefit in exchange for the cash value on your policy. Because the life insurance company doesn’t want to lose your business, it will more than likely accept your request.
During the trade, your objective should be to completely drain the cash value and transfer the full amount over to the death benefit or the face value. For example, if you have a universal life insurance policy with a $200,000 death benefit and $100,000 in cash value, your goal is to completely empty the cash value and boost the death benefit to $300,000. That’s $100,000 more that will fall into your heirs’ hands instead of going to the life insurance company.