I've had some unexpected expenses come up and was wondering if I could borrow that money against my life insurance policy.
Assuming that you have a type of life insurance policy that builds cash value (like Whole or Universal life) and depending on how long you have had it, it can be an excellent spurce of cash. The secret is not pulling out too much which. If you call the insurance company's customer service number they can tell you what the maximum recommended amount that you can borrow is. You might alos ask them what the affect would be if you simplify withdrew the funds you need. There are different ramifications to borrowing and withdrawing.
Yes: you can borrow against your cash value up to a certain amount (usually about 95%) but be aware: with an outstanding loan comes loan interest. And if the loan (or interest) is not repaid - and you are also borrowing for future premium payments - the policy may one day lapse. In addition to losing your coverage you may have a tax liability! There is a complicated formula that insurers use to calculate taxable gain when policies are surrendered. I have seen cases where policies with large outstanding loans lapse - and there is taxable income that exceeds the cash value! So you are in the hole, so to speak - its called " phantom income" Long story short here: make sure you are being properly advised by your agent or broker before you initiate a policy loan. Best of Luck! Evan
Dear Rhonda, You can borrow against your life insurance policy if it's a permanent policy with a growing cash value. Call the broker who sold you the policy, or the company, to confirm the logistics. Here's some relevant information: "Because permanent life insurance policies result in the accrual of equity in a savings account, that account becomes an asset that may be used to acquire a loan. Unlike most loans, these are not accompanied by a schedule for repayment, and repayment is actually not required. If the loan is not repaid, the amount will simply be subtracted from the policy, reducing the death benefit. A loan against a life insurance policy is not the same as a withdrawal of funds from the account, and for that reason, the insurance company may charge interest on the money you receive from the loan. Despite this fact, a loan against your policy may still affect the dividend earned on your account. It is usually possible to borrow up to the cash value of the policy. Interest rates vary widely for these loans and unexpected fees may appear during the borrowing process that will add to this baseline rate, so some policies may be more suitable for borrowing than others."
Borrowing money against a cash value life insurance policy is a great option for a consumer. It is fast, convenient and there are no pesky coupons reminding you to make a monthly payment. But while this is an option that is available, you need to beware of accruing interest that may threaten the policy's lapse (if there are insufficient dividends to help repay the loan for instance) and/or result in the very painful and real possibility of having to pay income tax on "phantom income" received.
Just like a 401(k) that offers loan provisions, it's nice to know the option is there but this shouldn't be used lightly.