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Guerrilla Budgeting 101-Part 3
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Parts 1 and 2 of this series focused on creating a Guerrilla Budget in the event you're laid off or otherwise lose your job in this tough economy. The idea was to project income over a reasonable period of time, say 3-6 months, then subtract projected expenses. What makes it a Guerrilla Budget is that you're considering only the most necessary expenses and are looking for sources of income to supplement severance payments and unemployment expenses that are likely to be inadequate to meet even the most basic of expenses.
In Part 2 we considered the "ins and outs" of tapping savings accounts, CDs, money market accounts, and mutual funds to make ends meets.
In Part 3, we''ll look at life insurance as a potential resouce:
Most financial planners (unless they also happen to be life insurance agents) aren't all that keen on cash value life insurance, especially old-fashioned whole life insurance. But if you were lucky enough to own whole life insurance with a quality company over the last ten years, you could have enjoyed about a 6% tax-deferred return. That's considerably better than the equities markets performed over the same period.
You should consider those cash values as "sacred" reserves, among the last resources you tap in an emergency. But if tap them you must, here are some guidelines.
If you own a Universal Life type of policy (including variable-universal life), you can probably access your cash values by taking withdrawals or by borrowing. The good news is that, in general, withdrawals are tax free until you've withdrawn more than you've paid into the policy. Loans, too, are tax free (at least until policy lapse or surrender). The bad news is that both withdrawals and loans reduce the death benefit dollar for dollar. Also, loans and withdrawals increase the potential for lapse or surrender of the policy. That's because when policy reserves are too low, you may be called on to pay interest or make contributions to keep the policy afloat. That could be tough in a time of tight cash flow.
If you own a whole life type policy (including a variable whole life policy), you can access cash values through loans or partial surrender. Again, loans are generally tax free, but reduce death benefits dollar for dollar and increase the polential for lapse or surrender. Partial surrenders are generally tax free only until you've recovered your investment in the policy and reduce death benefits considerably more than dollar for dollar (for example, three dollars for every of death benefit reduction for every dollar of cash you receive).
You can also access the net policy cash value of any permanent policy through outright surrender. But if the amount you've taken out of the policy in loans, withdrawals, and surrender proceeds exceeds what you've paid in, you'll have to pay taxes on the excess. The big concer is that you'll lose the coverage. And, chances are, when you reapply, you'll have to show new evidence of insurability and pay a higher premium because you are older than when you first bought your insurance.
Bottom line--life insurance cash values can supplement income in tough times, but consult your insurance professional to determine the tax and other consequences of loans, withdrawals, and surrenders in your specific case. A good insurance agent or financial planner may be able to restructure your insurance so you can avoid paying premiums for a while and keep the insurance in force. Reducing premium commitments is equivalent to increasing your income.
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