According to Edward Graves, author of “McGill’s Life Insurance,” life insurance can be used as an emergency cash fund to provide immediate funds and alleviate a sudden and urgent situation.
How Do I Withdraw Money From Life Insurance?
Graves suggests using your life insurance policy to obtain the funds necessary to cover damages caused by windstorms, lightning, tornadoes, hurricanes, flooding, earthquakes, or anything else that may not be covered by your homeowner’s insurance.
Withdrawing funds from your permanent life insurance policy is considered a policy loan. There are, however, advantages to “borrowing from yourself.” There is no interest added to any payments required to replenish the cash value of your policy. The funds are also not reported as income to the Internal Revenue Service.
Indicating that any funds withdrawn from a life insurance policy prior to the insured’s demise will reduce the death benefit by the amount withdrawn if the emergency funds are not returned.
Thus, no tax penalty will apply to the cash advance. Additionally, some policies permit you to never repay the funds. Keep in mind that the death benefit is reduced by the amount you withdrew from the face amount of your life insurance policy.
This means that your beneficiary will receive less money from your life insurance policy upon your passing. Nonetheless, having cash on hand from life insurance proceeds can make all the difference while still alive.
According to the Insurance Information Institute, homeowner’s insurance requires you to temporarily repair any damage to your home after a disaster to prevent further damage. Therefore, if you lack the funds to make these repairs, the eventual payout from your property insurance claim could be drastically reduced.