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Home Improvement Guide 2007
On the money
Whether it's a fresh coat of paint or a total home renovation, sooner or later it comes down to paying for it.
On the money
Finding cash for your remodeling plan
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11. Cashing in on cash-value life insurance
Cash-value life insurance policies, called whole life, universal life and variable life policies, or "permanent" insurance, create pools of money. As you pay into the policy, part of the premium goes toward a cash reserve. The insurance company invests that reserve and it grows tax free. The reserve is meant to subsidize your premiums later in life when insurance is more expensive as a way to keep your policy costs consistent. Yet you often can borrow from that reserve and generally at a much lower rate than a bank might offer.

The main drawback, Ferrara says, is that, typically, loans from insurance policies have no repayment schedule -- you can pay it back at whatever pace you deem appropriate. However, interest accrues every month and you receive an invoice every year for that interest. If you fail to pay it back, it gets rolled back into the loan, and your principle amount grows. "You end up with interest compounding the wrong way," Ferrara says.

If the loan grows larger than the cash value, the policy could lapse and you could be hit with a big, unexpected tax bill. And, if you die before the loan is paid back, your death benefit shrinks by the amount still outstanding on the loan plus interest. Glink is opposed to the policies altogether. Term life insurance rates have plummeted in recent years, calling into question the wisdom of buying higher-priced policies. "When you borrow against your policy you are still required to pay it back unless you lower your death benefit," she says. "I just think this is a terrible idea."

12. Take it out of your 401(k)
Most 401(k) retirement plans allows participants to withdraw loans for five years with no tax implications. Some policies allow you to withdraw the money for any reason, while others limit loans to health-care emergencies, to pay for education or for home improvements. While borrowing from yourself may seem like a wise money move, financial advisers uniformly denounce the idea.

Ferrara is against the 401(k) option for home remodeling because, he says, people don't save enough as it is. Even though you are paying yourself back with interest, you miss the chance to compound that money over the five years it is out of your account. Depending on how much you borrowed and how far you are from retirement, that lost compounding could translate into tens of thousands of dollars in lost income. "It really is the absolute worst thing you could do," Glink says. "That should be reserved for life-threatening situations."

Aside from the lost compounding, if you are fired or leave your job the loan comes due in full with interest. If you can't repay it, you get hit with an additional 10 percent early withdrawal penalty.

"That would really be my very last choice," Glink says. "I would rather not renovate than borrow from 401(k) to do it."

-- Posted: April 4, 2007
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