In this rough economy consumers look to credit cards, an IRA or 401(k), even under the couch cushions for emergency cash. Many may be overlooking life insurance as a potential source of immediate funds, according to a recent survey by the National Association of Insurance Commissioners.
Meanwhile, few plan participants are aware of the investment features some policies offer.
“When thinking about everyday finances, life insurance is not top of mind for most Americans,” says Adam Hamm, NAIC vice president and North Dakota insurance commissioner who chairs the NAIC life insurance and annuities committee. “According to [the] survey, more than two-thirds of consumers don’t know some types of life insurance include a cash value, and nearly half don’t think of life insurance as an investment option.”
The NAIC survey finds that 63% of consumers have life insurance. Out of the two types of life insurance, term and permanent, some permanent policies also include provisions for policyholders to access money immediately for any reason.
Permanent life insurance policies allow a portion of the money you pay into your premium to go into a cash value that grows over time, and if managed correctly, may include tax benefits.
Hamm says that plan participants that own permanent life insurance may be able to take out a loan against the value of the policy, provided they have been paying premiums for a pre-determined length of time.
“There are no requirements for using these funds and the interest rate on this loan may be cheaper than borrowing against a 401(k) or maxing out a credit card. There also may be tax benefits, since the cash from this type of loan typically is not considered income by the IRS,” says Hamm.
Another option for quick funds advisers should share with consumers may be to cash in a permanent life policy, which allows participants to immediately retrieve up to the entire accumulated value. This option is most viable for individuals who already have sufficient term life insurance or who no longer have financial dependents.
For Americans worried about the recent stock market volatility permanent life insurance may present a lower-stress way to put aside money for the future.
Almost half of respondents to the survey say tax-advantaged growth and low risk were priorities when investing in the volatile market, and both are features of some permanent life insurance policies. Additionally, 65% of respondents did not know some types of insurance include a dollar amount that is guaranteed to increase in value and may provide tax benefits.
With the value of retirement accounts down, permanent life insurance policies that build cash value may be a way to add stability to a financial portfolio and accumulate funds over the long-term.
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