Did you know that you can draw on the accumulated cash value of your life insurance policy when you need cash for big-ticket items such as financing your child’s university education or putting a down payment on a new home? When you’re low on funds in times of economic uncertainty, capturing the cash value in life insurance can help you avert a cash flow crisis, by freeing up cash for essential financial commitments including things like paying your utility bills or medical fees.
Here, I’ll share multiple legit options for tapping the cash value of your life insurance policy, and what you need to take note of (click the links below to jump straight to your different options):
- Converting your policy into a non-participating policy
- Taking a loan from your policy
- Surrendering your policy – partially or fully
Can you really withdraw cash from your life insurance policy while you’re alive?
Yes. If you have a whole life participating insurance policy, this is something you can certainly do. It’s a key feature that differentiates whole life from term life insurance plans.
If you’re facing a financial crisis, there are avenues for accessing the cash value of your life insurance policy to help you stay afloat. Before taking any action, you should do thorough research on the implications as policy terms vary from plan to plan.
Ways to tap the cash value on your life insurance policy
There are several different approaches for accessing the cash value of your life insurance policy so you can better manage your finances during a rough period.
1. Converting your participating policy into a non-participating policy
Say you’re experiencing economic turbulence or no longer earning an income and finding it tough to pay your insurance premiums. In this scenario, you can use your policy’s cash value to pay for your continued coverage. How? By exercising your option to convert it into a non-participating policy. By doing so, you’ll no longer have to pay premiums for the coverage, but note that your benefits will be reduced. You can convert your participating policy into one of these two types of non-participating policies:
• Reduced paid-up insurance policy (RPU)
With the RPU option, you’ll get to keep the same coverage term but with a reduced sum assured.
• Extended term insurance policy (ETI)
If you go with the ETI option, you’ll get to keep the same sum assured but you’ll be covered for a shorter term.
As exercising either of these options works by using your policy’s cash value to convert it into a non-participating policy, it will no longer hold any cash value and you will not receive any bonuses. Keep in mind that these options may also disrupt your long-term plans due to the reduced benefits.
Life insurance: par vs non-par policies
Participating (par) policies allow policyholders to participate or share in the insurer’s participating fund profits, and they provide both guaranteed and non-guaranteed benefits. An example of this is Singlife Flexi Life Income II.
Non-participating (non-par) policies usually provide only guaranteed benefits and generally do not have cash value. An example of this is Singlife Elite Term II.
2. Taking a loan from your policy
There are two ways a loan can be taken from your life insurance policy, and each method works differently. One is automatic, while the other needs to be initiated by the policyholder.
• Automatic Premium Loan (APL)
Also known as an Automatic Premium Loan (APL) or Automatic Non-forfeiture Privilege, this is where your insurer initiates a "loan" from your policy’s cash value to pay your insurance premiums, on your behalf. As your policy’s cash value would have accumulated interest had it not been tapped, this loan accumulates an interest charge that you’ll need to pay back.
With this option, you’ll have one less bill to think about and you can use the money you have for other expenses while continuing to be covered under your policy. Here are four moves to simplify your money management process.
APL is automatically activated when your policy premium isn’t paid by the end of your payment grace period, and only if there is enough cash value in your policy. It will continue to be activated as long as premiums aren’t paid, until the cash value is used up. However, when the cash value is used up, your policy will be terminated. If you’re confident that you’ll be able to pay the premiums and interest in the next few months or before all your policy cash value is used up, APL might be a viable option as it will not compromise your coverage term or sum assured. If you’d like details, here’s more on APL and NFL.
• Policy loan
If you need to fund a big expense such as your child’s university education, there’s the option of taking out a loan against your policy provided it has ample cash value.
Just like any other loan, you’ll have to make repayments. Remember that the loan amount, plus interest, will be deducted from the benefit payout, should you make a claim before returning the loan amount.
3. Surrendering your policy – partially or fully
You can make a partial or full withdrawal of cash value from your policy. This is the same as a partial or full policy surrender. It’s where you submit an application to partially surrender your policy by reducing the sum assured of the base plan and withdrawing a portion of the cash surrender value, or you fully surrender your policy and withdraw the cash surrender value. The cash can be used for things like emergency funds to tide you through a crisis.
After a full surrender, the policy will terminate. But should you decide on a partial surrender, the premiums, cash value and benefits of the policy will be reduced accordingly.
Always exercise caution with any form of surrender as surrendering a policy early, e.g. before maturity, usually involves high costs and the surrender value you could receive may be zero or less than the total premiums paid, especially in the early years. If you opt for full surrender, you will no longer receive protection coverage.
Should you surrender your policy?
Surrendering a policy before its maturity date has several disadvantages, aside from financial loss:
• You lose insurance protection
• You may not be able to achieve your intended financial objective
• You’ll lose the financial benefit accumulated over the years
• You may be unable to obtain a similar level of protection on the same terms again i.e. you may have to pay a higher premium because you’re older; and changes in age and your state of health could mean being excluded from certain policy features
Frequently asked questions about cashing out a life insurance policy
A zillion questions may be running through your mind as you consider whether to use the cash value on your life insurance policy.
Here are the answers to some common questions:
• When can I cash out my whole life participating insurance policy?
Typically, you should be able to tap the cash value once the policy has accrued cash value, which may be several years into your policy term, providing you’ve kept up with premium payments. Cashing out should be a last resort, such as if you’re facing a financial storm or need cash for a big-ticket expense, because you could be missing out on essential protection and value accumulated over a long period and you may incur cost penalties.
• How much will I receive if I surrender my life insurance policy?
Your whole life participating policy begins to build cash value after a minimum period, which is typically three years, provided all premiums are paid up-to-date. You can refer to your policy illustration for the illustrated cash surrender value you may get for early surrender. The illustrated cash surrender value will also include a portion of the non-guaranteed bonuses. In contrast, non-participating term protection policies generally do not have any cash value.
• Do I have to pay taxes when cashing out a life insurance policy?
Under Singapore tax laws, proceeds from personal life insurance policies are not subject to income tax.
• Is there a penalty for cashing out a life insurance policy?
Yes. Any potential cash value may be subject to deduction of distribution and insurance costs, surrender charge and other expenses depending on your policy terms and conditions. Should you surrender your life insurance policy and then buy a new one or another investment product, you’ll incur new charges which may comprise:
- distribution fee
- commission to agents or financial adviser representatives on the new insurance policy or investment product
- policy fee which is usually incurred for each policy
To sum up…
Whatever option you’re considering to use for the cash value on your life insurance policy, always consult your financial adviser representative first so that you can make an informed decision. The above information may not be exhaustive so it’s important to find out about any penalties, the possible impact on your policy and whether there could be a protection gap in terms of coverage.
