22 Jun Should I use my cash value to pay life insurance premiums?

Q. How can I decide if I should use my cash value to pay the premiums on my policy or should I pay out of pocket? I’m retired so I don’t have the same kind of income I used to but I don’t want to let the policy lapse.
— Retiree

A. Yours is a great question.

It’s important to know how to use the values in a life policy to avoid any surprises.

The first thing to know is the exact type of policy you have, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He said the answer will be different based on whether it’s a variable life, universal life or a whole life policy.

Let’s assume you have a pure whole life policy from a mutual life insurance company, where policy owners are the owners and share in the profits of the company.

“If you’ve been paying premiums all the past years and your policy was set up where profits — paid in the form of dividends — increase your guaranteed cash values plus increase the death benefit over time, you have many options,” Gaelick said.

You can use current dividends to reduce and possibly offset entirely the annual premium, he said, noting that values will grow slower but you might not have any out-of-pocket premium to pay.

If the current dividend is not enough to pay the entire premium, you can also “surrender” a portion of the “cash value of your paid up additions” which would cover the difference, he said.

This is the cash value of the additional death benefit purchased, he said.

Your cash value would decrease by that amount and the death benefit would reduce but by a larger amount, he said.

“And you might be able to do this for many years, if not forever,” he said. “That will depend on future dividends.”

The options are different for variable and universal life, so you should consult with your agent or a broker to verify the type of policy you have and look at your options with an emphasis on preserving the policy.

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This story was originally published on June 22, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.