Founder, Abrams Insurance Solutions, Inc., San Diego, CA
You can borrow against permanent life insurance (also called cash value life insurance) policies that have enough cash value for borrowing. The two major types of permanent life insurance are Whole Life and Universal Life. Universal life includes fixed universal life, indexed universal life and variable universal life. It is imperative to make sure that you don't borrow too much from the policy and cause it to lapse. A lapsed policy with a loan against it can result in tax implications for the policy owner.
There are four types of cash value accumulating life insurance products: participating whole life, current assumption universal life, indexed universal life and variable universal life.
Participating whole life has two basic loan provisions: spread loans and direct recognition loans. Current assumption universal life has four loan provisions: zero net cost, wash, spread and participating loans. The cost to borrow your money from your policy will vary depending upon which policy loan provision your life insurance policy uses. It becomes even more critical when you’re using life insurance as a supplemental retirement income vehicle. The loan cost can be as low as zero up to 350 basis points, so it matters.
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Participating whole life has two basic loan provisions: spread loans and direct recognition loans. Current assumption universal life has four loan provisions: zero net cost, wash, spread and participating loans. The cost to borrow your money from your policy will vary depending upon which policy loan provision your life insurance policy uses. It becomes even more critical when you’re using life insurance as a supplemental retirement income vehicle. The loan cost can be as low as zero up to 350 basis points, so it matters.