What could be the potential result of taking out a cash value loan under a life insurance policy

How does cash value life insurance work?

When you make premium payments on a cash value life insurance policy (typically any permanent policy), part of your payment is allocated to the policy's cash value savings component, which accrues interest over time. Whole life policies grow their cash value via a fixed interest rate, while universal life policies grow their cash value at a rate more dependent on the market (but with a guaranteed minimum rate).

Depending on the type of life insurance policy you have, your cash value can be used in different ways. If you have whole life and your cash value grows to equal your death benefit amount, your insurer will automatically terminate your policy and pay out the death benefit to you. If you have universal life, your cash value has the potential to result in a zero-cost policy — that means all premiums are paid from the built-up cash value. Both types of policies have cash value that can be used as a life insurance loan once it grows to a certain amount.

Note: The cash value insurance feature is generally designed to benefit you while you're still alive — by providing you with a loan option and a way to potentially decrease your premium payments. Your cash value will not affect your death benefit amount unless your policy specifically allows for the cash surrender value to be added to your death benefit (which can significantly increase your premium).

Can I cash in life insurance while I'm still alive?

Yes, there are ways to cash in your life insurance policy while still alive. However, these methods may result in changes to your death benefit amount or even ending your life insurance coverage:

• Sell back your policy: You may be able to fully cash in your life insurance while you're still alive by selling back your policy to the insurer in exchange for its cash surrender value, some of which may be taxable. If you cash in on your policy, your coverage will end and a death benefit will not be paid upon your passing. Consult with a financial advisor to determine your options and the tax and fee implications for cashing in on your life insurance policy.
• Take out a loan: If you want to maintain coverage while accessing some of your policy's cash value funds, find out if it has grown enough for you to borrow against the policy. You can then pay back this loan with interest (or have the owed amount subtracted from your death benefit when you pass away). Note that if you borrow the full cash value of your policy (or possibly a lesser amount set by the insurer), it may result in termination of coverage — essentially selling back your policy in exchange for the cash value.

What kinds of life insurance policies accrue cash value?

The cash value feature is included on permanent life insurance types like whole life and universal life. Since final expense life insurance is a type of whole life, it can also have cash value and can be a more affordable option for obtaining a policy with cash value.

How to get life insurance

You can get a life insurance quote and compare rates online. You'll answer some questions, and then you'll choose your coverage amount and other policy details. You can also call 1-866-912-2477 to speak with a licensed representative who can help you find the right policy for you.

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims-paying ability of the issuing insurance company.

2 Dividends are not guaranteed. They are declared annually by Guardian's Board of Directors. The total dividend calculation includes mortality experience and expense management as well as investment results.

3 Some whole life policies do not have cash values in the first two years of the policy and don't pay a dividend until the policy's third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information

4 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met, the policy will most likely lapse.

5 "Funeral Costs: How Much Does an Average Funeral Cost?" Parting, September 14, 2019

6 Deceased Taxpayers – Understanding the General Duties as an Estate Administrator" IRS, July 16, 2019 

7 https://www.policygenius.com/life-insurance/affordable-life-insurance/ Last accessed August 2020.

8 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

Guardian® is a registered trademark of The Guardian Life Insurance Company of America, New York, NY.

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