Co-Founder, Coastal Financial Partners Group, California
If the cash value is large enough and the policy can be sustained after taking the planned policy loan, it may be a better alternative to taking conventional loans from a bank. The idea is that you are borrowing some of the cash value of a policy you own.
Some policies are better than others - check the cost of taking a policy loan. For example, some policies might charge you 5% in loan interest but only credit the loaned portion of policy cash value with 3%. The rate of loan interest may vary over time as well. Thus, the net cost of borrowing may be a few percentage points. Over time, this might add sufficient drag to your policy to make it difficult to sustain. You can pay loan interest as you go but most people choose to add the interest to the policy loan.
You can repay the loan or have the loan deducted from the death benefit when you die. As long as the policy does not lapse, the policy loans are income tax free. If the policy lapses, the borrowed amounts taken in the past to the extent of gain in the contract will be subject to income tax in the year of lapse.
Your life insurance professional can help you manage your policy to take advantage of the valuable policy feature without unintended consequences.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Is borrowing against a policy a good idea? Yes, it can be, it can depend though. Keeping the policy in force is important as it creates some tax advantages on the funds borrowed as you are essentially taking a part of your death benefit early for use elsewhere.
Where borrowing against your life insurance is a good idea is in what steps you have to take to do compared to other avenues. Have you ever sat in a bank office cubicle while someone else decides if your need is worthy enough? How they have to decide if your need fits? A great thing about borrowing against your value is you simply make a call and the money is wired to your bank account. You are not asked to explain your need, your need is not subjected to review by somebody else. Simply put, what you want to do with those funds is not subject to the approval of somebody else.
Founder, Abrams Insurance Solutions, Inc., San Diego, CA
Borrowing against life insurance policies can be a good idea and many policies are designed to provide cash to use for college funding, retirement income, or emergencies. Some policies, especially Indexed Universal Life Insurance, have a loan option where the borrowed money comes from the insurance company's general account. This allows your money to stay in your account earning uninterrupted compound interest. This is a great way to build wealth by using "other people's money". As noted above, your policy must not lapse to maintain the tax advantages of this strategy.
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Some policies are better than others - check the cost of taking a policy loan. For example, some policies might charge you 5% in loan interest but only credit the loaned portion of policy cash value with 3%. The rate of loan interest may vary over time as well. Thus, the net cost of borrowing may be a few percentage points. Over time, this might add sufficient drag to your policy to make it difficult to sustain. You can pay loan interest as you go but most people choose to add the interest to the policy loan.
You can repay the loan or have the loan deducted from the death benefit when you die. As long as the policy does not lapse, the policy loans are income tax free. If the policy lapses, the borrowed amounts taken in the past to the extent of gain in the contract will be subject to income tax in the year of lapse.
Your life insurance professional can help you manage your policy to take advantage of the valuable policy feature without unintended consequences.
Where borrowing against your life insurance is a good idea is in what steps you have to take to do compared to other avenues. Have you ever sat in a bank office cubicle while someone else decides if your need is worthy enough? How they have to decide if your need fits? A great thing about borrowing against your value is you simply make a call and the money is wired to your bank account. You are not asked to explain your need, your need is not subjected to review by somebody else. Simply put, what you want to do with those funds is not subject to the approval of somebody else.