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Need extra cash? Get it from your whole life insurance

By Maryalene LaPonsie on January 13th, 2012

While many people have life insurance, relatively few know they can access cash from their policy in the case of an emergency. Those findings come from a survey conducted by the National Association of Insurance Commissioners (NAIC).

According to the association, permanent life insurance policies can provide a stable investment vehicle with a guaranteed return, making them a good choice for those wishing to avoid the volatility of the stock market.

The NAIC survey found 63 percent of consumers have life insurance of some type. While term life offers affordable life insurance for a fixed period of time, permanent policies such as whole life guarantee coverage so long as premium payments are made.

Although term life does not include any investment features, permanent plans build up a cash value that can be accessed for virtually any reason depending upon the policy's specific provisions.

Whole life insurance as an emergency fund

Despite marketing efforts by life insurance companies, the NAIC found more than two in three consumers did not realize some life insurance policies included a cash value. In addition, 65 percent of survey respondents did not know certain types of life insurance may guarantee a minimum level of investment growth or that there may be tax benefits associated with life insurance.

With widespread misunderstanding about how life insurance products function, it is not surprising many consumers fail to consider a loan from their policy in the event of an emergency. However, the NAIC says a loan from a life insurance policy can make more sense than using consumer credit or raiding a retirement account.

"If you own permanent life insurance, you may be able to take out a loan against the value of the policy, provided you have been paying premiums for a predetermined length of time," says Adam Hamm, vice president of NAIC and North Dakota insurance commissioner. "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."

When comparing life insurance quotes, be sure to learn whether a plan builds cash value as well as any restrictions on available loans. While term policies may have more affordable life insurance rates, whole life offers investment benefits that may pay off in the long run.

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