Life insurance can be used as an emergency cash fund for immediate funds and alleviate an unexpected and urgent situation, says Edward Graves, author of “McGill’s Life Insurance.”
How Do I Withdraw Money From Life Insurance?
Graves recommends using your life insurance policy to obtain funds necessary to cover damage from windstorms, lightning, tornadoes, hurricanes, flooding, earthquakes, or anything which might not be covered by your homeowner’s insurance policy.
Pulling money from your permanent life insurance policy is considered a loan against your policy. However, there are some benefits to “borrowing from yourself.” There is no interest tacked on to any payments you would need to make to replenish your policy’s cash value. The funds also are not reported to the Internal Revenue Service as income.
Pointing out that any money pulled from the life insurance policy premature to death of the insured, does diminish the death benefit by whatever funds were pulled, if you do not pay back the amount taken in the emergency.
Thus, there will be no tax penalty on the cash advance. Also, some policies even allow you to never pay the funds back. Keeping in mind, that the death benefit is minimized by the amount of money you withdrew from your life insurance plan’s face amount.
What this means is that your beneficiary will receive less financial support from the life insurance policy after your death. Yet, having the available cash from life insurance proceeds can make all the difference while still living.
It’s important to note that homeowner’s insurance requires you to temporarily repair any damage to your home after a disaster to prevent further damage, according to the Insurance Information Institute. Thus, if you do not have the funds to make these repairs, the eventual property insurance claim settlement might be sharply reduced.