“Not all insurance products have cash values, but many do,” said Frossard, CCO at Foresters Financial. “And what you can do with those cash values is you can either choose to use them to pay your premiums, for example, or you could take a loan against them, or you can actually withdraw some as well.”
But the process of pulling cash values out of policies should be done carefully with the help of a financial advisor, according to Frossard. She says advisors should be particularly conscious of the potential taxation consequences of withdrawals and loans against cash values, emphasizing the case-to-case basis this process requires.
“There could be some tax consequences, and that will vary by individual, but there certainly can be withdrawals and loans may be partially taxable if they exceed the policies adjusted cost basis,” she said. “Really understand all of your portfolio, and by that I mean all of the assets that you have. Also consider your liabilities, your income, etc, and make sure that you know this does make sense for you and your particular circumstances.”
She also warns that those looking to take advantage of their life insurance assets should be aware of the potential pitfalls surrounding death benefits. Taking a loan against your cash values can be beneficial in the short term, but she says this loan must be accompanied with a realistic plan to pay it off, as a death would pass on the loan and its interest to the individual’s next of kin.
“If you take a loan and the proceeds of the loan that haven’t been paid off, if you pass away, it would be deducted from the death benefit, as well as any interest that would have accumulated,” she said.
