Unlike term life insurance, permanent life insurance, such as whole life, universal life and variable life, builds up a cash value that the owner may get back from either surrendering the policy or borrowing against it. Because of this unique feature, people use their cash value life insurance in a couple different ways.
Step 1
Treat your cash value life insurance policy as a forced savings account. The premium paid into the account builds up a cash value that grows tax deferred; earnings therefore are not subject to income tax until withdrawn. Also most cash value policies are taxed on a first in, first out basis meaning, according to Michael Fliegelman CLU, ChFC, RFC author of "Why Whole Life," "dividend withdrawals are tax-free up to the amount cumulatively paid in premiums."
Step 2
Borrow against your cash value life insurance policy. You can use the cash value within a policy to pay for higher education expenses, household bills or to fund an emergency account. You can then choose to repay the loan at a later date or the insurance company will subtract the loan amount from the death benefit when the insured dies.
Step 3
Surrender your cash value life insurance policy for cash, a reduced paid up policy where the death benefit is decreased and policy premiums are no longer required or for extended term insurance which pays your beneficiaries the full death benefit if you die within a scheduled time period.
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