Cash flow keeps a business afloat and allows a business owner to purchase new assets. It’s not much different for an individual. Cash flow enables you to pay your bills and invest for the future.
Some life insurance policies, such as whole life, have a built-in savings element, since you pay premiums and build up a cash value within the policy. A cash build-up can keep the premiums level as the policyholder ages and his or her mortality charges rise. There are tax advantages to building up cash, and some people use life insurance to keep, grow and tap cash benefiting from some of these tax advantages.
Why tap into your life insurance policy for cash?
Some people use the cash for college tuition, emergency home repairs or buying a car. I’ve used my policy for a down payment on a home. You can access cash from a policy by taking the money as a loan. Good financial planning, of course, dictates you pay your loan back. Some policies (e.g., whole life) enable you to direct the dividends to pay off the loan and/or loan interest.
What are some pros and cons of this strategy?
You access the cash value quickly (e.g., usually one or two weeks) compared to four or five weeks to process a Home Equity Line of Credit. You can access the funds without creating tax consequences (in most instances). But tapping your cash can jeopardize the longevity of your policy, as the main purpose for the cash is intended to offset future mortality costs.
Is this a strategy for someone who is a young investor as well as a mature one?
It’s a great strategy for investors of all ages, as long as people understand how to use it properly. For young people with income and tax burdens, overfunding their insurance can create a legal tax shelter. A good thing. For older people, cash-value policies become important in the long term because they often need cash value to keep the insurance in force. Plus, other retirement planning benefits can come such as protecting defined pension income for a surviving spouse and replacing retirement nest egg assets that are spent.
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