A. There are 4 ways you can tap your permanent life insurance policy for cash needs:
1. Use 1035 Exchange
A 1035 Exchange allows you to convert your life insurance policy to an immediate annuity, you will give up the death benefit, but you will lock in income for the rest of your life. The conversion is tax-free, but you will pay taxes on a proportion of your basis (the amount you paid in premiums) to your gains. Even the current insurance company might offer you 1035 exchange, make sure to shop around and find a better deal.
2. Withdraw Cash Value
A permanent life insurance policy has two parts: the death benefit and the cash value. You can withdraw the amount in the cash value account at any time, tax-free. This is an especially valuable option in a market downturn year.
3. Borrow Against Your Policy
You can borrow against your policy, although you will have to pay interest with rates ranging from 5% to 8%, depending on wither your loan is fixed or variable. If you don't pay the loan back, the balance will be deducted from your death benefit.
4. Use Dividend Payouts
If your insurance policy pays dividends, you can use them to ride out market downturns instead of reinvesting the dividends in the policy. You can take dividends in cash, reducing or eliminating the need to withdraw money from your portfolio. Any dividends you receive up to the policy's cost basis are tax-free, those that exceed that amount are taxable.