Help! I Can't Keep Up with My Life Insurance Premiums!

If you find yourself struggling to meet your monthly life insurance premiums, you have options. The last thing you want to do is simply stop paying and lose all the benefits you’ve been paying for since the time you first purchased your policy. If you have accumulated cash value in your whole life policy, this can be the tool you need to get yourself out of a tight financial spot.

What are my options for using my policy’s cash value?

You can take loans from a paid-up policy, if you have one.

You can take out a loan from the cash value portion of your paid-up policy. There are a couple of catches, though: first, you’ll have to pay taxes on a loan you take from a single-pay policy because it’s classified as a modified endowment contract (MEC). MECs are subject to the Internal Revenue Service’s (IRS) excise tax, which means if you are under 59 ½ and take a distribution, a 10% penalty will be applied. The second catch is that the loan amount plus the interest on the loan will decrease the amount of death benefit the policy pays out to your heirs. Be sure to consult with your insurance agent and your tax professional before making a final decision.

You can surrender the policy for the cash value.

If you surrender your whole life insurance policy, you’ll receive the cash value, minus any applicable surrender fees. Additionally, cash you receive from a surrendered life insurance policy (unlike loans from a non-MEC) is subject to income tax—and if you took out loans before surrendering your policy, those become taxable, too, once the policy is surrendered. Of course, there will be no death benefit, since you will no longer have the life insurance policy.

You can transfer the cash value into a single-premium policy.

If doing away with the monthly premium payments on your whole life policy is what you need to make ends meet, it is possible do this while maintaining a death benefit for your heirs and avoiding incurring additional tax liability. Instead of withdrawing the cash value from the policy (or surrendering it entirely), you can use that cash value to purchase a single-premium whole life insurance policy. In fact, many whole life policies provide a non-forfeiture option called “reduced paid-up insurance” that allows you to do this immediately without having to open a new policy.

How does a single-premium whole life policy work?

Single-premium whole life insurance allows you to transfer wealth to your heirs tax-free in most cases, just like a traditional whole life policy. Be aware, however, that estate taxes apply to sufficiently large estates. Instead of making monthly payments, you can use the cash value that’s accumulated in your current policy to purchase the single-premium policy outright—so you never owe another penny. The purchase is an income tax-free exchange under IRS code Section 1035.

Single-Premium Whole Life from ELCO Mutual

ELCO Mutual's Platinum Eagle single-premium whole life policy provides guaranteed cash value accumulation in addition to the potential for dividend growth. An accelerated death benefit rider is available on all standard issue policies, allowing you to access a portion of the death benefit in the event that you become chronically or terminally ill, require home health care, or become confined to a nursing home. Even if you don’t meet any of the criteria for receiving the early death benefit, you will still be able to access the cash value that accumulates on the single-premium policy via loans, as described above. The Platinum Eagle policy is available to individuals from age six months through 85 years and does not require a medical exam.

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