Should Your Life Insurance Double as Your Savings?

It's really not a good idea.

It's important to have money in your savings account for a variety of reasons. First, you never know when an unplanned bill might pop up that your paycheck can't cover, like a home or car repair that can't be put off. Also, you might lose your job for a period of time. Without savings, you might struggle to cover your expenses -- or rack up costly debt in the course of getting your rent paid.

A recent SecureSave survey found that 67% of Americans couldn't cover a $400 emergency expense with money in savings. So if you're in a similar boat, you might consider it a wake-up call to start building some cash reserves.

But what if you have a life insurance policy that builds up a cash value? Can that policy take the place of actual savings? Or do you still need separate money in the bank?

Life insurance shouldn't double as savings

It's true that if you have a whole life insurance policy, it will generally, in time, accumulate a cash value. That cash value is a sum you can borrow against or even cash out if you need to.

But even if you have whole life insurance, it's still not a good idea to neglect your actual savings. For one thing, it can take time for your policy to accrue that cash value, and you might face a financial emergency before that happens.

Secondly, the purpose of life insurance isn't to serve as your emergency fund. Rather, the purpose of life insurance is to provide your loved ones with a financial benefit in the event of your untimely passing.

So, let's say your life insurance policy has built up a cash value, and you withdraw it to cover an expense like home repairs. What happens if you pass away shortly afterward? In that case, you'll be leaving your loved ones with that much less money.

Build your own emergency fund

Putting life insurance in place is a smart thing to do, and it's an act of kindness for your family. But having life insurance should not take the place of having cash savings.

In fact, as a general rule, you should make a point to have enough money in the bank to cover at least three full months of essential bills. The logic there is that if you were to lose your job, it might easily take you three months to find a new one and begin receiving a paycheck again.

Incidentally, if you're thinking of signing up for a new life insurance policy, you may want to opt for one that doesn't accumulate a cash value. While whole life insurance has its benefits, including the fact that it covers you indefinitely, it can be very, very expensive -- so expensive that you might struggle to carve out money for near-term savings if you're paying those premiums. Term life insurance may end up being a far more cost-effective option, even if you won't get a cash value buildup as part of your policy.