contrary to term life insurance, whose duration of coverage is limited and does not accumulate cash value, universal life insurance has a cash component, especially later. “In the early years of politics, most premium goes to the financing of indemnity advantage. As the policy expires, the cash value increases, ”says Luke Brown, a retired insurance lawyer in Tallahassee, Fla. Who operates YourProblemSolvers to help consumers solve their insurance problems, health and consumption.
Key points to remember
- Borrowing against your life insurance policy should be a last resort when most other financing options have been exhausted.
- You will only be able to borrow if you have permanent life insurance (whole life or universal life), which includes a cash component, unlike term life insurance, which does not.
- This is because permanent life insurance allows you to borrow against the funds that have accumulated after a certain time, usually a decade; the money is yours tax free, but of course there are mandatory interest payments.
- Repayment of the loan is optional; however, if you do not repay, the death benefit will be paid at a lower rate because the life insurance company subtract the loan and the unpaid interest rates.
- If you repay, you can make periodic payments with annual interest payments, pay annual interest only, or deduct interest owed from the cash value still in your policy.
How much, how long
As the cash value increases in a whole or universal life insurance policy, policyholders can borrow against the accumulated funds. Life insurance policy loans have a distinct advantage: the money is paid into your bank account tax free.
Insurers generally don’t make any promises as to how quickly or how much the cash value will increase. This makes it difficult to know exactly when your policy will qualify for a loan. Additionally, insurers have different guidelines describing a policy’s cash value before you can borrow against it – and what percentage of the cash value you can borrow.
Your policy is likely to have sufficient cash value to borrow “usually after the 10th.e the year the policy is in force, ”said Richard Reich, president of Intramark Insurance Services, Inc., a life insurance agency in Glendale, California.
Another thing to know: this loan does not take money out of your own cash value. “You actually borrow from the insurance company and use the cash value of your policy as collateral, says Reich.
No need to repay
One of the cool things about cash value loans is that you don’t have to pay them back – a big plus in an emergency.
If you are repaying all or part of the loan, options include periodic payments of principal with annual interest payments, annual interest payment only, or interest deduction from the cash value. “Loans have an interest rate like any other type of loan. It tends to be between 7% and 8%, which is high in our current environment, ”explains Reich. The interest will be fixed or variable, depending on your policy.
There is a good reason to pay off the loan if you can. “If the loan is not repaid before death, the insurance company will reduce the face amount of the insurance policy when the claim is paid,” said Ted Bernstein, CEO of Life Insurance Concepts, Inc., a life insurance consulting and auditing company. in Boca Raton, Florida.
The accrued interest can dramatically reduce the benefit: “If the policy loan goes unpaid for many years, the loan amount goes up and up because of the added interest,” Brown cautions. “This puts the policy in danger of not providing beneficiaries any sum of money on the death of the insured.
“At the very least, the interest payments should be made so that the policy loan does not increase effectively,” adds Brown. This gives you a better chance of having money to pay after your death.
Before borrowing against your life insurance, consult a Financial Advisor to weigh all the options and all the possible outcomes based on your financial portfolio.
When a loan makes sense
Here are some financial situations where a life insurance loan might be a wise choice:
You can’t qualify for a standard loan or you need the cash now
Because the money is already under the policy and immediately available, it’s a quick source of immediate funds for a new oven, medical bills, or some other emergency, with no credit checks required. Even if you qualify for a traditional loan from a bank or checkout, a life insurance loan can be a stopgap if you don’t have time to wait for your application to be processed. When the traditional loan matures, use it immediately to pay off the life insurance loan.
You cannot pay the annual premium for your policy
Don’t let a life insurance policy expire because you can’t afford the payment. A loan can keep the policy in force as long as the death benefit is greater than the loan amount.
Your only other loan options have much higher interest rates
Before paying a higher interest rate for a loan or pledge additional guarantee for a traditional loan, consider taking out a life insurance policy loan, says Bernstein. “Since there are no loan conditions such as refund dates, renewal dates or other fees, compared to traditional loans, life insurance policy loans can be very competitive, ”he says.
The bottom line
Choosing if and when a life insurance loan is right for you is subjective, Reich says. “You have to see what is most important; the immediate need for money or your family’s need for the death benefit. Understand that any outstanding policy loan will be deducted from the death benefit, which will reduce the benefit for your family. ”