How cash surrender value lending can finance unexpected needs.
There’s no question that having an easily accessible source of funds provides peace of mind. There will likely be occasions when access to extra money can come in handy. You might experience an unexpected emergency, be presented with an opportunity to invest in the markets or a business, decide to renovate your home or face any other short or long-term financial need. In these situations, people tend to seek out a loan or apply for a line of credit.
What many may not know is that the cash surrender value (CSV) in a permanent life insurance policy is just like a savings account. It’s there in case you temporarily can’t meet an insurance premium payment and it’s also a great investment tool that can be a potential source of cash flow. But simply redeeming the CSV can put your policy at risk and it could have adverse tax consequences.
The good news is that you can access the cash value in your permanent life insurance policy without cashing it in, and it’s a fairly straightforward concept. You can use the CSV of your policy to secure a line of credit. Because the money is readily available, you can act quickly if a financial emergency occurs or there’s an opportunity to make an investment.
Each situation is unique
There could be a number of different scenarios in which CSV lending could come in handy and depending on your financial situation, there are various lending options to choose from.
If you’re retired and looking for an additional source of retirement income, tapping into the CSV of your policy might be worth considering and could offer some tax advantages. Depending on your situation, you might be able to use the money as tax-free income and reduce taxable withdrawals from your Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or other non-registered investments.
Perhaps you just want access to a line of credit in case an unexpected financial need or opportunity arises. The good news from a tax perspective is that when you use the loan proceeds, taxes won’t be triggered since you aren’t making a withdrawal from your life insurance policy itself. If you use the funds to make an investment, the interest paid on the line of credit may be tax deductible, depending on how the money is invested.
For those who have more complex estate planning, investment or tax management needs, an Immediate Financing Arrangement (IFA) might be worth considering. This is a lending strategy that combines an individual’s need for permanent life insurance with cash flow management. It targets affluent business owners or high net worth individuals who are comfortable with the concept of borrowing funds with a long-term horizon. An IFA gives these individuals the opportunity to preserve cash for investing in their business, real estate or other investments. How the money is invested could make the interest paid on the line of credit tax deductible.
Speak with your advisor
If you are interested in learning more about how you can improve cash flow through your permanent life insurance contract, talk to your advisor about CSV lending. It’s also a good idea to talk to a tax specialist if you plan on using insurance lending as a tax strategy.