Hidden reasons not to access your own life insurance policy money

Economic hard times have left many people scrambling for cash to meet modern lifestyle demands and essential everyday expenses. If you have a life insurance policy, this can be used as a possible source of much needed funds. However, there are serious implications to using your life insurance money to meet immediate cash needs, especially if you access your own life insurance policy money at the expense of your family's financial future or your own long-term goals.

1. Tricky and costly

The option to access your own life insurance policy money is formally known as access to "accelerated death benefits.” This option is often very tricky and costly to get because life insurance is designed expressly for use by your loved ones after you die. However, there are exceptional times when you may need to access the money yourself, at which point you may be able to do so.

Some life insurance policies have provisions for accelerated death benefits under special circumstances, such the onset of an expensive, incapacitating medical condition. Limits as to how much you can access, however, usually apply and you will be required to provide annual certification from a recognised healthcare professional to prove that you are indeed suffering an incapacitating medically condition.

Some life insurance companies will require you to pay a fee upfront to access accelerated death benefits. In addition to this upfront fee, other extra charges may be added to your insurance policy premiums. Yet other life insurers will reduce the life benefits due to your loved ones upon your death to cover your accelerated death benefits.

2. Tax implications

Life insurance proceeds are usually exempt from taxation. However, if you take accelerated death benefits, the proceeds may be taxable. This means you may in fact end up short of the amount you needed from accelerated death benefit after tax. That said, though, death benefits paid to persons who are chronically ill are usually also exempted from tax.

Bottom line

Taking accelerated death benefits is a major decision that has far reaching consequences. Before you access your own life insurance policy money, sit down with an insurance agent or other advisor and review your personal circumstances, as well as your life insurance policy.

Discuss the eligibility requirements and cost of taking the accelerated death benefit. After you fully understand what you are getting into, make an informed decision on the best way to go about getting the accelerated death benefits. Remember; always get insurance that you can afford. This can make it easier to get accelerated death benefits.

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