Insurance understood: Pumpkin seeds

By Steve Meldrum on October 1, 2022.

Do you carve a pumpkin each year for Halloween?

It’s a bit early but this past weekend, I did with my youngest daughter. One of our favourite perks is roasting the seeds inside. Not everyone cares for pumpkin seeds but we look at them as a bonus and this year we had a lot of seeds. The process of scooping out the seeds got me thinking of insurance.

Hear me out.

Some insurance policies have comparable seeds, called cash value, that you can harvest if you wish. Such policies, called permanent insurance, can vary in the amount of cash value that they have.

I am going to talk about three main ways that you can access the cash value. The first method, called a policy loan, is pretty straight forward.

You simply make a request to the insurance company and within a few days they deposit funds into your bank account. Since it is part of the terms of the contract, you cannot be denied access.

You can choose the amount of the loan up to the cash value of the policy. These loans are tax-free up to a certain threshold, and beyond that are considered taxable and included in your tax return as regular income, so be aware.

Of course, since it is a loan, there will be interest charges attached and it’s worth noting that they are usually higher than the next option.

The second method is a collateral loan. This one is more involved as it requires another financial institution to provide the loan.

The lender usually requires additional info to evaluate the risk of providing you a loan and it takes time to go through the approval process. There are some streamlined lenders who can do it in a week or so for lower amounts but the higher the loan the more involved, which can take a few weeks or longer.

Your access is not guaranteed here but since they are using the policy cash value as collateral, the lender does have some security. An advantage over policy loans is that collateral loans are never taxable.

This helps you avoid a tax surprise.

As mentioned earlier, these loans are typically at a lower interest rate than policy loans. So, it may be worth it to go through the process if you have a larger or longer time horizon.

Ok, there is one more option to access the cash value. It is simply cancelling all or a portion of the policy. This just takes a few days but often has tax consequences.

On the bright side, you don’t have any interest charges. However, you have lowered or eliminated your insurance coverage. This is usually an option of last resort.

Each of the above can be appropriate given a different fact pattern. There are a lot of reasons to access the cash value but it is worth noting that if you do for business or income producing purposes, you can deduct those interest charges.

If you are accessing the cash value for retirement or personal purposes, there is no tax deduction. Remember, you don’t have to make the decision of what fits best for you alone. You can and should poll your professional team for guidance.

Steve Meldrum B.Mgt. CFP CLU is the founder of Swell Private Wealth Ltd. For over a decade he has specialized in helping individuals and businesses expand protect and perpetuate their wealth. For further information or tailored advice, contact him at 403-487-0490, steve@swellwealth.com or connect on social media

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