Wednesday, February 11, 2015

Is Your Life Insurance Policy Emergency Cash Stash?

Where would you turn if you needed money fast and suddenly? Believe it or not, a viable answer to that question is your permanent life insurance policy. Notice that we said permanent. While permanent policies, whether they’re whole life or universal life policies, are good for getting money in a hurry, term life insurance usually is not.

Your permanent policy, however,will accumulate cash value as time goes on. In the early stages of the policy, the cash value grows slowly since most of that value is being used to build up the indemnity benefit. Once that’s taken care of, though, the policy can start to grow in terms of its cash value, making it a nice little “emergency nest egg” for you for those unexpected things that happen in life.   

Do bear in mind, however, that when you take money from your life insurance policy, it’s not without its drawbacks. You will, for starters, have to eventually pay the money back; it’s considered a loan to yourself.

The good news, though, is that the loan can be deposited directly into your bank account. And, what’s even better is that you will not be required to pay taxes on the borrowed money.

If all of that sounds good to you, you may be ready and more than willing to start borrowing. Don’t move too fast though! Different insurance companies tend to have different requirements related to how old your policy must be and how much value it must have before you can take out a loan. And, even then, there are typically rules about how much you can borrow. So, before you get too excited about having a money source, check the rules put in place by your insurance provider. It’s even better if you know these rules from the start. That way, you won’t be disappointed or waste your time trying to get cash where there isn’t any just yet.

While every insurance provider is different, most won’t let policyholders borrow money off their policies until the policy is at least ten years old or so. That rule doesn’t exist simply to be harsh either; it’s just that most policies won’t really have sufficient funds for borrowing until that point.

If everything does work out in your favor and you end up borrowing against your insurance policy, it’s really up to you if you pay it back or how much you’ll pay back. You aren’t borrowing more than you have, so if you don’t pay back the loan, that amount would just be permanently deducted from your policy and would become the property of the insurance provider. Obviously, you don’t want to lose the money you’ve spent years saving and that your family will one day need, so even if it’s tough, you’ll want to work out some arrangement with your insurance provider to get the loan paid back.

Most insurance providers will give you plenty of options for paying back the loan, so it can be done, even if it takes a while. Just remember that you should never borrow against your life insurance policy frivolously. Think long and hard about why you need the money, and if it’s not for a very good reason, either go without or find another way to borrow it. A good financial advisor can help sort you out about whether or not a loan is a good idea, thus allowing you to make smart choices that will benefit you both now and in the future.

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