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Long run costs of dipping into insurance? As far as the status quo goes, it has been reported that a large number of people are dipping in for non-retirement use. This brings into limelight economics of the insurance funds or retirement savings. Dipping may not seem to have adverse effects initially or may be deemed as a necessary measure, but its long term effects are quite harmful on overall fiscal stature.
What do the stats say?
The data that has emerged from the market concludes that one out of four U.S residents who with a savings account or a 401(k) program is using the money for current use. This amount that is withdrawn has calculated to be around $293 billion in 2012. This is indicative of how unsafe or insecure insurance or retirement security becomes.
The situation is compounded because there have been cuts in terms of social security benefits and Medicare, meaning that the sustenance of insurance or retirement funds is the need of the hour. The pension plans nowadays are nothing to boast off either, so a stringent control of the insurance fund is needed.
More stats related to this include the 12 percent increase in people who have taken out loans against their retirement funds.
The Harms
By taking loans against the retirement funds, there is a need to understand that the loan has an associated interest as well. This creates a money management disaster for people at the end of the day. Analytical stats from NJ car insurance indicates that people are investing in insurance more than ever, but by dipping, they themselves are diluting their holdings, and incurring costs (not visible at the moment) that have the potential to haunt them later on.
Another thing that people should be aware of is that by dipping before the age of 60 (which has been happening a lot), a tax penalty of 10 percent has to be paid, and general income tax later on. The simple economics is that if insurance funds are withdrawn, there would be an increase in income, leading to a levitation of higher tax. Many people ignore this and use it for current payments rather than the intended use. In cases where the dipping amount is on the larger side, there is a relevant issue of putting the money back.
The Benefits
If by controlling the temptations of prematurely using the insurance funds or retirement savings, people have a chance reap the appropriate benefits. By allowing the money proper time to mature, the gains would be much higher minus any tax that has to be paid if the money was spent. Furthermore, the economic situation on the global scale is quite competitive. Prices of homes, cars and similar commodities are on the rise. In such scenarios, a relevant deterrent is provided by insurance money. Apart from extreme rare cases of emergency, it is never advisable to dip into your insurance funds. The amount may seem small at first, but its long term losses are far too great.
It’s the worst thing you can do, but at the same time, in the most dire of circumstances, it can feel like it’s the ONLY thing one CAN do.