FINANCIAL PROBLEM SOLVED!

"Should I cash in my life insurance?"

Problem

I'm in my 40s and was recently diagnosed with cancer. I won't be able to practice much longer. I'm looking for a source of cash to pay off some of our family debts and lower our monthly expenses. I have a whole life insurance policy on myself; should I cash it in and use the money to pay bills?

Solution

Cashing in your life insurance policy isn't your best option, under the circumstances. There are better ways to make use of the money in the policy.

First, see if your policy has an automatic premium loan feature; you may have opted for it, or it may be part of the policy. If it does, you can stop making premium payments; the policy will remain in force and keep growing by "making its own payments" from the existing cash value. You'll have a loan balance on the policy, and when you die, the death benefit will be reduced by that amount. You can use the money you would have used for the premium payments for paying bills or other needs.

Or, if you need more money than doing that will generate and have a significant amount of cash built up in the policy, you could borrow up to 90 percent (in many cases) of that value. Say you have $100,000 of cash value in a $1 million policy. If you borrow $90,000 and then die, your beneficiaries will still receive a $910,000 death benefit, and you'll have had the use of $90,000.

Another possibility is to use the policy as a living benefit. Let's say that your life expectancy is now five years. That means you could be more aggressive about using your already-accumulated assets. You could take out a home equity loan, or dip into your stock or mutual fund holdings with the confidence that the insurance company will reimburse your heirs when you pass away. Instead of using your life insurance as a first source of money, use it as a permission slip to tap into other assets.

Yet another option is to use the life insurance policy as a source of collateral for a bank loan, particularly if you don't have enough equity in your house for a home equity loan. If you have a $1 million life insurance policy, which is a guaranteed asset, you can probably get a loan at a better rate.

Finally, see if your policy has an accelerated-benefits provision. The amount varies, but with many policies, this lets you borrow up to 75 percent of the death benefit. The insurance company advances the proceeds as a loan.

So, if you have a $1 million policy, the company can advance $750,000, minus a loan percentage fee. You can use this money to pay bills or enhance your life in your remaining months. Typically, there are specific situations that allow you to take advantage of this feature; such as having a terminal illness in which you are expected to pass away within 12 months, or having contracted a medically incapacitating condition. It may not be appropriate for you right now. But it may prove helpful in the future.

This issue's problem solver is Todd Bramson (todd.bramson@northstarfinancial.com), CFP, CLU, a financial adviser with North Star Resource Group in Madison, WI. Financial Problem Solved! is edited by Senior Editor Leslie Kane.

Do you have a question you'd like a financial adviser to address? Please submit it via e-mail to Solved@medec.com, or by regular mail to Medical Economics, 5 Paragon Drive, Montvale, NJ 07645. ATTN: Financial Problem Solved! If we select your query, we'll address it in an upcoming issue. Your name will not be used.

Leslie Kane. Financial Problem Solved!

Medical Economics

Oct. 24, 2003;80:50.