Careful: If the loan balance grows to exceed your cash value, you will be asked to put more cash into the policy, or risk it lapsing. Image: Noey smiley/Shutterstock.com
By: FEDweek StaffIf you have a cash value life insurance policy, you can borrow against it. This might be a source of income to consider in retirement, especially if a need arises for a sum of money and you don’t want to take out a different kind of loan with typically higher rates.
Pros:
* You don’t have to fill out any lengthy forms, prove your income, or produce a high credit score.
* Interest rates are reasonable, compared with credit card debt.
You don’t have to pay the interest that’s charged by the insurance company.
Cons:
* The amount you borrow, plus accrued interest, will be subtracted from the death benefit eventually paid to your heirs.
* If the loan balance grows so much that it exceeds your cash value, you will be asked to put more cash into the policy. If you don’t comply, the policy may lapse and you’ll owe a substantial amount of income tax.
* If you do pay the loan interest, those payments are not tax-deductible.
Therefore, you should borrow cautiously from your life insurance policy, and only if you’re willing to reduce the amount paid to your beneficiary at your death.
That said, you can think of a cash value life insurance policy as an emergency fund, as a retirement planning tool, or as an investment vehicle, among other things. It can also be used to supplement income, cover other expenses, and pay off debts.
To borrow against a policy, you’d need to contact the insurance provider to get a loan agreement and workout repayment terms. In some cases you can borrow against the entire full death benefit, minus any loans or outstanding interest – and often with a competitive rate. Typically, the loan would be repaid on a monthly basis or when the policy matures, and the policy will remain in force as long as you make all the required payments.
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See also,
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