Navigating Cash Value Access in Permanent Life Insurance Policies

Clients seeking to access the cash value of permanent life insurance policies such as whole life or universal life face complex decisions with multiple financial implications. Policyholders have the option to request policy loans, partial surrenders, or cancellation, but these choices often conflict with long-term objectives like preserving the death benefit. Partial surrenders and outstanding loans at death reduce the death benefit and could undermine the policy’s effectiveness as a financial tool. Advisors are encouraged to guide clients in prioritizing their goals and understanding the tradeoffs involved.

The financial impact of accessing policy funds includes potential tax consequences since partial surrenders and policy loans are treated as partial dispositions under tax law. Clients should be cautioned to reserve a portion of withdrawn funds for tax liabilities. Advisors also note the risk of policy lapse, especially with underfunded universal life policies where loan balances plus interest may exceed the cash value, risking loss of coverage if premiums rise or mortality costs increase.

An alternative to policy loans is leveraging the life insurance policy as collateral for a loan from a financial institution. This approach is generally not taxable and can sometimes offer better interest rates but involves more stringent underwriting and documentation. It also carries risks such as relinquishing policy rights during the loan term and potential loss of the policy if loan terms are not met.

Insurance professionals should ensure that clients fully understand interest rates, funded status, and potential long-term impacts on policy performance before proceeding with cash access. Collaborative planning sessions focusing on clients’ priorities can help balance immediate liquidity needs against preservation of benefits and compliance with tax considerations. Advisors also have a role in reviewing market options beyond traditional banks to secure competitive financing when using policies as collateral.

Overall, navigating cash value access requires comprehensive advisory support to mitigate unintended financial consequences. Transparent communication about reduced benefits, tax implications, and loan risks is critical to informed decision-making and optimal alignment with clients’ broader financial plans.