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Unknown Benefits of Life Insurance

The economic situation in our country is one of the most talked about during this election year.  Presidential candidates are trying to convince the voters that they have a plan to rebound the crisis and lower the national unemployment rate, which hit 8.3% in recent months.  In the meantime, many are struggling to pay bills, keep a roof over the heads of their family, or even put food on the table, leaving them feeling trapped and out of options.  However, according the Fox Business article, “Out of Work? Consider Tapping Your Life Insurance Policy for Quick Cash,” a life insurance policy could be a short term solution to this very long term problem.

A recent survey completed by the National Association of Insurance Commissioners (NAIC) found that nearly half of people surveyed didn’t know that life insurance can include investment options, and 2/3 didn’t realize that some types of life insurance include a cash value. This statistic could lead you to conclude that most people just don’t know that cash funds can be available through their life insurance policy.  Term life insurance policies do not develop cash values and are only paid out when the insured passes away.  On the other hand, whole, universal, variable, and permanent life policies combine both death benefits and investment components that build cash value over time, which can be borrowed if necessary.  Frank Darras, an attorney specializing in insurance and contributing to the original article, stated that he always recommends people avoid pulling funds from a life insurance policy if necessary.  He recommends cashing in CDs first, stocks and bonds next and finally life insurance and 401(k) policies, as a last resort.  The main reason for this is so your policy doesn’t terminate by allowing the loan to exceed the cash value.  If it lapses due to nonpayment, then the policy will not be able to be renewed at the same rate at which it was established, typically much lower than a new rate.  However, if you’re in a position where it’s necessary to borrow money from your policy, the funds can be repaid to restore the full value of the policy.  Borrowing money from yourself is much cheaper than using credit cards, cash advances, or bank loans, in most cases and there’s no repayment schedule; both reasons why some opt for this alternative.

In addition to providing quick cash in an emergency, some life insurance policies can also help ensure stability to your financial plan in a volatile market.  Almost half of the people surveyed by the NAIC claimed that tax-advantaged and low-risk growth were considered priorities in their current investments, due to the market volatility.  Permanent life insurance can provide both because the money invested in these policies (beyond the insurance costs) earns interest annually, with many insurers guaranteeing at least 3-4%.   Whether looking to borrow money for an immediate circumstance, or build your nest egg over time, it is wise to review your life insurance policy to explore all of your options.  It would be wise to discuss any major changes you’re considering with a financial planner or representative from your insurer to be sure you fully understand any consequences your actions may carry.

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