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Ask the Life Insurance Expert

What are my options with my life insurance cash value?

The cash value benefit of permanent life insurance policies is one reason they carry higher premiums than term life, which has no cash value and is in effect only for a certain number of years.

You’ve paid for a policy with cash value, so why not use it? Here are your options:

• Cover your premium payments

Once you've built up enough cash value you're policy is known as "paid up" and you can use the cash value to cover your premium payments. However, you might have to resume paying premiums to keep the policy in place if you decide to withdraw some cash.

• Take out a loan

You can take out a loan against your cash value life insurance policy and pay it back with interest at a rate typically lower than a bank loan. You could pay back the loan or have the money you owe, plus interest, deducted from the death benefit (but your beneficiaries will not collect as much as they would have if you had repaid the loan).

• Withdraw cash value

You can withdraw part or all of your cash value. How that would impact your death benefit depends on the policy. For a universal life insurance, your benefit would be reduced on a dollar-for-dollar basis, but in some cases withdrawing cash could reduce your death benefit by more than the withdrawal.

Before you do anything, check the policy carefully to learn the impact of tapping the cash account on the death benefit as well as the tax consequences. Cash value grows tax deferred and is only taxable when you take out more than you paid into the policy. For instance, say you paid $15,000 in premiums, have $20,000 in cash value and withdraw $17,000. In that case $2,000 would be taxable.

Read more about cash value in life insurance: What’s it worth to you?

Last updated: Sep. 29, 2010