Out of work? Tap your life insurance policy for quick cash

By Sheryl Nance-Nash Posted : 02/29/2012

dollar sign in life preserverIf you're currently out of work, you're not alone. The unemployment rate checked in at 8.3 percent in January, according to the Bureau of Labor Statistics (BLS).

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The BLS today released unemployment statistics for each state in its "Regional and State Unemployment, 2011 Annual Average Summary" report, and several states have the unfortunate distinction of outpacing the national average for last year.

States with annual average unemployment rates significantly higher than that of the nationwide average of 8.9 percent for 2011 include the following:

California: 11.7 percent

District of Columbia: 10. 2 percent

Florida: 10. 5 percent

Michigan: 10. 3 percent

Mississippi: 10.7 percent

Nevada: 13. 5 percent

North Carolina: 10. 5 percent

Rhode Island: 13. 3 percent

South Carolina: 10. 3 percent

Whether you're unemployed, simply running out of options for quick cash in an emergency or seeking an alternative investment to the rocky stock market, pull out your life insurance policy. It might be a lifesaver.

How to leverage your life insurance policy for financial aid

More than two-thirds of people don't realize that some types of life insurance include a cash value, and almost half are unaware that life insurance can have investment options, according to a recent survey by the National Association of Insurance Commissioners (NAIC).

What do you need to know to tap that policy?

For starters, review the policy. If you have a term life insurance policy, you're out of luck. Such policies don't develop cash values, and pay only when the insured dies during the time the policy is in effect. Whole life insurance, universal life, variable life and other "permanent" policies combine a death benefit and an investment component that can build cash value over time.

If you have a permanent policy, contact your agent, broker or insurance company to find out the cash value in your policy. (Typically, it can take a few decades for a life insurance policy to accrue enough cash value to make it a worthwhile option for financial aid in a pinch.)You also want to know the interest rate you will be charged on the amount you borrow and whether the interest needs to be paid quarterly, semiannually or on the anniversary of the loan, says Frank Darras, an attorney specializing in insurance with DarrasLaw.

The interest rate can be fixed, such as at 8 percent. Other policies have a variable rate that changes according to economic conditions, says Edward Graves, associate professor of life insurance at The American College in Bryn Mawr, Pa.

Are you sure you need to borrow from your insurance plan?

The decision to borrow from your life insurance policy should not be made lightly. "I always recommend cashing in your CDs first, and then bonds and stocks, the life insurance cash value and your 401(k) last," says Darras.

Why? Policy loans, plus accrued interest, can grow to exceed the cash value in the policy. If so, the policy will terminate and there will be no more life insurance contract or potential benefits, explains Graves.

It's critical to keep an older life insurance policy in force. Letting it lapse for nonpayment means you won't be able to replace it for the same premium as when you bought it now that you have aged and your health history may not be as good as when you were younger. Also, if you choose not to pay yourself back, you diminish the value of the death benefit, says Adam Hamm, NAIC vice president and North Dakota insurance commissioner.

However, any money taken from a policy as a loan can be repaid to restore the full face amount of the policy.

Benefits of borrowing from yourself

If you must borrow, know that there may be a provision that stipulates when money can be removed. Typically, though, the loan does not have to be explained or justified. "The owner has a contractual right to access policy loans and they are generally delivered promptly," says Graves.

The maximum amount of the loan cannot exceed the cash value in the contract at the time of your request. In fact, the loan will usually be limited to 98 percent or less of the cash value, says Graves.

The big upside to borrowing from yourself is that it will be much cheaper than traditional cash advances, credit card interest rates and bank loans. There is no repayment schedule. It's up to you to pay it back or not, with consequences. There may also be tax benefits, since the cash from this type of loan typically is not considered income by the IRS, according to Hamm.

 

Life insurance as low-risk investment

Just like life insurance can be a refuge of sorts in a financial crisis, it can be a source of calm in a stormy stock market. Nearly half of those surveyed by the NAIC said low-risk and tax-advantaged growth were priorities when investing in today's volatile markets. Sixty-five percent didn't know some types of life insurance include a dollar amount guaranteed to increase in value, or that such policies may provide tax benefits.

"Permanent life insurance can be a lower-stress way to put aside money for the future. The dollars that go into the investment channels of these policies (beyond the costs of the insurance), accumulate interest each year. Insurers typically guarantee a minimum of at least 3 [percent] to 4 percent a year," says Hamm.

However, it's important to investigate how the various permanent policies work. They are decidedly different. For example, whole life insurance policies offer a fixed premium for the duration of the policy, guaranteed annual cash value growth and a guaranteed death benefit. They do not provide investment flexibility and it is not possible to change the policy coverage once established.

Universal life offers more flexibility than whole life, in that it leaves it to the policyholder to determine the amount and timing of premium payments (within certain limits), and to adjust coverage levels as needs change. Like whole life insurance, there is a guaranteed annual cash value growth and no investment flexibility.

 

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