Which is the Best Option - 401k Loans Vs Selling Your Annuity For Cash?
Which is the Best Option - 401k Loans Vs Selling Your Annuity For Cash?
According to Kiplinger.com, there has been a significant increase in the amount of 401k participants that are borrowing against retirement savings. These borrowers have most likely fallen on hard times if they are willing to borrow against their retirement fund. The 401k participants think that borrowing against their 401k is a good idea. However there are financial issues that need to be considered before you tap your 401k for cash. So I wondered which is better-borrowing against your 401k or selling your annuity for cash.
The Pros of borrowing against your 401K [1]
If you default on the loan, it won't hurt your credit
The interest you pay goes into your 401k account
The money is taken out of your check as a payroll deduction
The interest paid on the loan is significantly less than most credit cards
The Cons of borrowing against your 401k [1]
If you default on the loan, you will have to pay income tax plus an early withdrawal fee on the unpaid balance
If you quit or loss your job you have to pay the loan back within 60 days or you will have to pay income tax and an early withdrawal fee
If the amount you are paying in interest on the loan is less than the amount of interest your money was earning through investments you are actually losing money
You have to pay the money back within 5 years unless you used the money to buy a home
If you default there is a loss of future retirement income
The Pros of selling your annuity for cash
Get access to your cash immediately
You do not have to pay it back
There is no defaulting or affect on your credit score
You don't have to sell all your payments
The discount rate is usually less than credit card interest rates and high interest mortgage rates
You can re-invest any remaining money in other investments with higher returns and lower tax consequences
The Cons of selling your annuity for cash
If you needed the money as a steady source of income in the future you will not have it unless you reinvested the lump sum into another investment
By receiving your future payments today, they may lose value slightly, this is known as discounting
Conclusion
In these uncertain times there is a real possibility of losing your job. Will you be able to pay back the loan if that happens? Will have be able to pay the taxes and the withdrawal fee? Withdrawal fees are usually around 10% [1]. Do you have other retirement income, not including social security, which you can live on?
If you have an annuity and you do not need to live on the stream of payments, it may make sense to sell your payments rather than taking out a loan against your 401k to pay off your debt because the discount rate could be less than the fees and taxes associated with defaulting.
If you don't have an annuity to sell, I would still use the 401k loan as a last resort because it could cause you to end up deeper in debt. Obviously reducing expenses is the best route. Kiplinger also suggests trying to withdrawal money from a Roth IRA or borrowing against a whole life insurance policy as well as selling unwanted items on eBay as other options to get money.
Can I Sell My Life Insurance Policy For a Lump Sum of Cash Or Do I Need To Hold It?
If you're nearing retirement, you might be wondering, should I sell my life insurance policy? It's usually a choice between stability and instant money. A steady source of income sounds nice, but you'll also want to be prepared for emergencies or rare business opportunities. Selling your insurance policy is a viable option if you have no financial obligations, but there are things you need to note before you cash in. Here are some tips to help you.
The next most important question is, how do I sell my insurance policy? Before you start looking for buyers, make sure you qualify for a settlement. Most buyers only accept policies that meet a minimum face value, usually from $100,000 to $250,000. Sellers must also be over 65 and likely to live the next 20 years or so.
Your buyer takes on several risks when they buy your policy. Market fluctuations, bankruptcy, and early death are just some of the things that could go wrong after the sale. To compensate, they count this risk against the purchase value of the policy. So if I sell my life insurance policy worth $100,000, I might get as little as $20,000 depending on the risk.
There are also other risks to you as a seller. For instance, if I sell my insurance policy, I may no longer be covered for future medical expenses. My beneficiaries' insurance benefits will most likely be waived as well.
Some people also ask, can I sell my insurance policy if I'm terminally ill? The answer is yes, and it can be even more profitable than a regular senior settlement. This type of sale, known as a viatical, is meant for people with a terminal illness, rather than a condition that simply makes the weaker (such as heart disease).
Viaticals are much less risky because there is certainty to the policy holder's time of death. This is why they are worth more than regular settlements -up to 80% of your policy' face value, compared to the 20% you might get from a senior settlement.
Another common question is: Can I sell my life insurance policy and still get monthly payments? You can do so by selling only a portion of your policy, and keeping the rest of the payments intact. People usually opt for partial sales if they don't need a large lump sum just yet, or if they want to retain some stability after cashing in.
There are other possible ways to structure the sale. For example, if I sell my life insurance policy for a partial settlement, I can get part of the lump sum and get the rest in monthly installments. Make sure your buyer explains all your options and helps you choose the best strategy.
Choosing a buyer is also an important step in selling your policy. The idea is simple - just like you wouldn't buy a car from just anyone, I wouldn't sell my life insurance policy to a buyer I've never heard of. Look for professional buying companies with extensive experience, as they can give you the most flexibility and give you the best rates.
Remember, your money today is always worth more than it will be tomorrow.
Cashing in allows you to use your money now, instead of waiting for monthly payments that are bound to depreciate. As long as you work with professionals, selling your insurance policy is certainly one of the best financial decisions you can make.
