GETTING MONEY FROM YOUR LIFE INSURANCE

You can get money from your policy by taking loans, dying, or surrendering your policy. Some life insurance companies also pay dividends to policy owners.

If you surrender your policy, you will no longer have insurance protection. You will receive the cash value. The value of your cash value that exceeds your premium payments is considered taxable income.

You can generally borrow the cash value of your policy through tax-free loans. Loans can be used for almost anything you can think of: education, retirement funds, or even to pay off a mortgage. However, borrowing reduces the cash value and overall death benefit of your policy. The future cash value of your policy also will be affected by borrowing. You must pay back the loan with interest, or the overall death benefit of the policy will be reduced.

When a life insurance company takes in more money than it needs to pay benefits, meet expenses, and reserve cash value, it has a surplus. This surplus then gets paid back to its owners in the form of dividends. In the case of a mutual life insurance company, the policy owners get the dividend. For a stock life insurance company, the stockholders get the dividend. Since dividends paid to policyowners are considered a return of premium, they are tax-free. How you use a dividend is up to you. It can be paid to you in cash, used to buy more coverage, used to pay off policy loans, or used to pay future premiums. Death proceeds from your policy are not subject to income taxes but might be subject to estate taxes if the insured owns part of the policy at the time of his or her death.

Let's review the benefits of cash value life insurance.