Universal Life Insurance And Cash Accumulation
You have probably heard about people taking out a loan on their life insurance policy, but don’t really understand what that means. How can you take out a loan on insurance? The answer is simple: you can access a cash accumulation account that grows over time when you are paying the premiums on a Universal (whole or permanent) life insurance policy. How does it work? Let’s take a look at the basics.
Cash Accumulation Accounts
When you pay the premium on a Universal life insurance policy, part of what you are paying is the actual premium, or what is also called the cost of insurance. This is the minimum amount that is required to keep the policy in force. The remainder of the premium, usually a pre-determined amount, goes into a savings account where it earns interest and accumulates over time. The longer you pay the premiums on the policy, the more money will add up in the account. You can even choose to pay a higher monthly premium so that more money goes into the savings account.
Loans And Surrenders
There are two ways to access the money in your life insurance account. One is a loan, and the other is a surrender or a withdrawal. The main difference is whether or not you pay tax on the amount. Because the money placed in a life insurance cash accumulation account is tax-deferred, you won’t pay any tax on it as income unless you take it out as a surrender. When you take it as a loan, however, you don’t have to pay tax on it. You do, however, have to pay it back to the cash accumulation account with interest. If you withdraw money from the account as a surrender instead of a loan, there may be a surrender charge that you will have to pay to get the money out. Bear in mind that if you should pass away without paying back the loan, the amount will be deducted from what is paid out to your beneficiaries.
How Do I Access The Money?
If you want to access the cash value of your policy, contact your insurance agent. It’s a good idea to discuss the pros and cons of a surrender versus a loan before you make a decision. Your agent can give you all the necessary details such as surrender charges and interest rates on the loan to help you choose the right option.