Thanks for a great question. Cash value inside of a life insurance policy can serve as a valuable resource at many different stages of life. It can be used as part of a complex income strategy in your retirement years, or it can be borrowed against if needed in a pinch. There are many uses for it, but to your question, it is important to understand how you can access it when the time comes.
First, cash value is only built up within permanent life insurance policies, like whole life or universal life insurance. Term insurance does not build up any cash value; if you currently only have term insurance, it may be a good time to review your life insurance needs and wants to determine if you have the right types of coverage for your situation.
Second, some policies offer loans from cash value and some others offer both loans and withdrawals. There are important differences as both can impact the amount of death benefit that you will leave behind to your survivors.
With a loan, your loan balance will have an interest rate charged to it, however, many policies also still credit interest to your cash value including the amount borrowed, so the interest rate could be very low compared to a personal loan or credit card rate. There may be some nominal fees charged for processing the loan as well. Loans are not required to be paid back, however, this is where it gets a little tricky. Your outstanding loan balance and accrued interest will simply reduce your policy's death benefit. It's important to keep paying your premiums though, if your policy lapses or your terminate your policy, the loan could create some tax consequences.
With a withdrawal, its a bit more straight forward; the money you pull from your cash value will reduce your death benefit typically by a proportional amount. Withdrawals are typically made from your basis, which is the total amount of money that you contributed; this means that withdrawals up to your basis amount are not taxed. Same scenario applies as with loans, if your policy lapses or you terminate it, you may have some tax consequences.
Each policy has different terms, so it is important that you review your individual contract(s) and speak to a specialist to understand your policy specifics. It is also beneficial to review your financial situation with your financial advisor and tax professional before you take out a policy loan. We are here to help; our advisors can be reached at 1-800-531-USAA (8722).
Thank you again for your question and your membership!
Director of Life and Health Insurance Advice