4. Repeatedly dipping into the cash value of your life insurance
Just like some people constantly take loans from their 401(k) plans, some people are habitual "borrowers" from their permanent life insurance policies, creating two potential problems.
First, regardless of your life insurance rates or the total premiums you've paid, any loans against the policy that remain outstanding when you die will reduce the death benefit paid to your beneficiaries.
Additionally, "the biggest caution is to be aware that if you're depleting your cash value and it's not considered a loan, it’s going to be a taxable event," says Jean Dorrell, president of Senior Financial Security in Summerfield, Fla.
Non-loan insurance distributions will be taxed at your ordinary income tax rate. Ouch!
Pages in this slideshow:
- 5 ways to screw up your life insurance
- 1. Neglecting to tell your beneficiaries that you even have life insurance
- 2. Buying life insurance to benefit multiple people but naming only one beneficiary
- 3. Forgetting to update crucial personal information
- 4. Repeatedly dipping into the cash value of your life insurance
- 5. Dying with a large, underutilized cash value