You Have A Variable Life Insurance Policy
Variable life insurance is another form of permanent life insurance, in which part of your premiums are placed in an investment account, and your cash value only increases when the return on investment is positive.
When you take out a policy loan using your variable life insurance policy as collateral, you may pay more interest than you would if you had a simple whole life insurance policy. Thatâs because you could be charged an opportunity cost, which is the difference between what your premiums were earning while invested and the amount youâre paying the insurer in interest payments.
Can You Borrow Money From Term Life Policies
Most of the time, you can take cash from your life insurance policy after you have built up the cash value. You will have to contact your financial advisor or insurance agent to determine your policy’s cash value. Discuss what the impact will be on your policy, as well as any tax implications.
Inexpensive life insurance policies, such as term life insurance, don’t build any cash value. For that reason, they don’t allow you to borrow money from them. Term life insurance is so affordable because it is purely a life insurance policy.
Term life has no value other than the actual death benefit paid upon the death of the insured. And that’s only if the insured dies within the fixed term.
Is It A Good Or Bad Idea
Traditional life insurance was designed to provide beneficiary death benefits in the event of the insured person’s death. However, there are now some life insurance products available that include a savings or investment component.
Some insurance agents tout the benefits of life insurance with investment components. Those benefits include being able to borrow money from the cash value of the policy after you’ve paid premiums. Two types of life insurance policies that provide cash value are whole life insurance and universal life insurance. Check your life insurance policy to see whether it includes a loan provision.
Being able to use your policy if you need an emergency loan sounds great. But be aware of the pros and cons of policy loans to ensure that you don’t put your coverage and paid premiums at risk.
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Should I Pay Back My Whole Life Insurance Loan
In theory, the money you are allowed to borrow from your whole life insurance policy is yours. A whole life insurance loan uses your loan as collateral. If you don’t pay it back, the policy will eventually lapse. When this happens, your beneficiaries lose their inheritance from the life insurance, and you lose the opportunity to use the money again in the future. In addition, if you don’t pay the loan back and the amount you borrow reaches the amount of cash value , you may find yourself owing taxes.
Policies You Can Borrow From
A whole life policy is a more expensive type of life insurance, but it has no expiration date. The term lasts the lifetime of the insured. While the monthly premiums may be higher, money paid into the policy that exceeds what is needed for the death benefit is invested by the life insurance company, creating a cash value after a few years.
A whole life policy essentially has two values: the face value or death benefit, and the cash value that acts as a savings account. Once the money invested increases the amount of the death benefit, the tax-free cash value can then be borrowed against. It is also important to understand that the policy loan is not taken out of your death benefit but borrowed against it, and the insurance company uses your policy as collateral for the loan.
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Can You Borrow Against Your Life Insurance Policy
The cash value in a life insurance policy is equivalent to the amount of money you would receive if you surrendered the policy. Each time you pay premiums for a cash value life insurance policy, such as whole or universal life insurance, part of the premium is put towards the cash value.
The cash value grows over time at an interest rate set by the policy’s terms. If you have a permanent life insurance policy that accumulates cash value, you can borrow money from the insurer using the cash value as collateral. However, this option is typically only available once your life insurance policy’s cash value has reached a specific size, which may take five to 10 years of paying premiums.
Term life insurance policies are cheaper than permanent policies because they don’t have a cash value component. You can’t borrow against them, and if you decide to surrender a term life insurance policy, you won’t receive money in return.
What Are The Documents Required To Borrow Against A Life Insurance Plan
Only minimal documentation is required to take a loan against your life insurance policy. All you need to do is fill and submit your loan application form along with the original life insurance policy document and an assignment deed that assigns the benefits of the policy to the lender. In addition to these, you might also be asked to submit copies of your identity proof and your address proof.
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How To Borrow From Your Life Insurance Policy
Taking a loan out on life insurance is fairly straightforward. The first step is to determine whether the life insurance policy is one of several types of permanent policies that are eligible for borrowing, including:
- Whole life
- Universal or adjustable life
- Variable life
- Variable universal life
Unlike a bank loan, there is no approval process to earn a loan against a life insurance policy. It may also be possible to take the loan as a cash surrender value line of credit to be drawn from as needed.
Interest on the loan will begin to accrue immediately, at a rate determined by the insurer which may be lower than the rate a bank would charge. In the best-case scenario, the loan repayment will begin immediately, usually monthly.
Should You Borrow From Your Permanent Life Insurance Policy
On the advantage side, borrowing against your policy can be a much easier process when compared to a bank’s loan procedures. How much you can borrow depends on the amount of cash value your life insurance policy has accrued over time, as well as your individual policy. In addition, the interest rates on life insurance policy loans can be competitive with most lending institutions.
Another advantage to life insurance policy loans are the flexible repayment terms. As a general rule, most life insurance loans come with an at will repayment plan. That means that while you may be sent a statement every month, you don’t have to make a loan payment unless you want to. The interest will keep accruing and compounding, but it allows you the flexibility to skip payments if need be. However, it’s important to monitor interest accumulation and the loan balance when using your policy’s cash value to cover interest as, over time, this can cause your policy to lapse and even create a large tax bill.
*As long required premium payments are timely made.
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How To Name A Beneficiary
It’s important to name a beneficiary for each policy form when you purchase life insurance. If you dont, your insurer will assume by default the beneficiary is your estate.
You may want to consider naming an alternate or contingent beneficiary. This is the person or persons who will receive the proceeds of the death benefit if your named beneficiary dies either before you or at the same time as you.
It’s a good idea to review your beneficiary designations from time to time and update them if necessary.
Get Protected With Life Insurance
Theres no time like the present. Act today to help protect your loved ones tomorrows. Learn about why you may need a life insurance policy and the various types available at through American Family Life Insurance Company today.
Need more info? An American Family Insurance agent is happy to answer any of your questions.
This is a brief description of coverage and is subject to policy and/or rider terms and conditions which may vary by state. Fixed and guaranteed premiums are statements about the policy as determined at issue, and any changes made to a policy may affect the premium and are subject to our underwriting rules. The words lifetime, lifelong and permanent are subject to policy terms and conditions. DreamSecure Whole Life and Flexible Life Insurance policies mature at age 121. Please check with an American Family agent for details on coverages and restrictions.
*Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance will be deducted from the death benefit at the time of claim or from the cash value if surrendered. If the loan balance grows too large for the cash value to support it, the policy could terminate. Partial surrenders may affect the death benefit and could require additional premiums to keep the policy in force.
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Borrowing From Your Life Insurance Policys Cash Value
This has been termed borrowing from yourself, and while the interest you pay on such loans actually goes to the insurance company, the fact that your remaining cash value continues to earn interest does make the process similar to being your own banker.
The idea here is that because your remaining cash value after the loan has been paid out still earns interest, the actual interest rate on the loan will often be much lower than would be the case if you took out a personal loan from a bank or used a credit card.
In this article, we will take a deeper look at this and other pros of borrowing against life insurance along with the cons associated with doing so.
In addition to going over the details of the loan process well also cover the types of circumstances likely to be most favorable for taking out life insurance loans.
Does Your Life Insurance Have Cash Value
Not all life insurance policies have funds tucked away inside. To get cash out of your life insurance, it needs to be a permanent policy, such as whole life, that has had time to build cash value.
Term life insurance doesnt qualify. Its typically the most affordable type of life insurance, but the main trade-offs are that term life lasts for a limited time and has no cash value. You cant take money out of this type of policy.
Permanent life insurance often costs much more than term life, but part of the premium goes into an investment account that you may be able to tap. Whole life insurance, also sometimes called ordinary or straight life insurance, is the most common type of permanent policy. Other variations, such as universal life, variable universal life and indexed universal life, may also have cash value.
If your policy is relatively new, its unlikely to have much cash value yet. Building cash value is like growing a savings account with small deposits over time. Youll typically need to pay premiums for several years before theres enough cash value to be useful.
Also be aware that the cash value of your policy can be much less than the total premiums youve paid or the amount of insurance you bought. If your whole life policys cash value grows undisturbed, it should eventually reach the death benefit of the policy, but that may not happen until youre 100 years old.
Calculating Taxable Income From A Policy Loan
Heres how to calculate the potential gain in the policy that would be subject to income tax:
1. Add the net cash value, any dividends received and the outstanding loan balance.
2. Subtract the cost basis .
Example: If a life insurance policy terminates with a loan balance of $100,000 and a cost basis of $50,000, the taxable gain would be $50,000.
Please note that the above example is a general rule and may not apply to every situation. You should consult your tax advisor to confirm whether you have a taxable gain.
Your life insurance company will be able to provide you with the cost basis, along with the gain that they will report to the Internal Revenue Service as 1099 income.
While a policy loan can provide you with immediate funds, it can have a number of drawbacks. Know what youre getting into before you take the cash.
Why You Shouldnt Take Out A Policy Loan
While your permanent life policy is in force, you can use it to take out a loan, but that could reduce the death benefit or even cause the policy to lapse. Policy lapse is the biggest risk, but life insurance loans can also lead to diminished death benefits, among other concerns. Along with selling your policy, taking out a loan needs to be considered very carefully before you make the decision.
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What If I Don’t Repay A Loan On My Permanent Life Insurance
Williams said you can pay the loan back or never pay it back and keep the policy until you die. However, he noted if you die with an outstanding loan, the insurance company will reduce the death benefit payable to your beneficiaries by the outstanding loan amount.
If you have enough cash value or dividends on your policy, you can use the dividends to pay back the loan. This depends on the type of permanent life insurance product you have.
If you want to cancel your life insurance policy and you took out a loan that you haven’t paid back, you’ll need to contact your insurance company to start the process to get cash surrender value. Cash surrender value is the money you’ll receive back when you cancel a permanent life insurance policy.
If you cancel your insurance policy while you still have a loan, you will receive the cash value minus the outstanding loan balance and any fees associated with canceling your policy. You will also have to pay taxes on the cash value received. Before surrendering your permanent life insurance policy, consult an accountant or tax professional about the tax implications.
Types Of Life Insurance Policies You Can Borrow From
There are different types of life insurance policies. The two most common types are term life insurance and permanent or whole life insurance.
A permanent life insurance policy is one that has no expiry date. When the premiums youve paid into the policy exceeds what is needed to cover the death benefit, the insurer will start investing that money, creating a cash value. This cash value acts as a savings account and is one that you can borrow against.
On the other hand, term life insurance policies are provide coverage for a fixed number of years, usually between 10 and 30 years. They do not provide a cash value and hence cannot be used to borrow money.
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Understanding Net Borrowing Rates And Insurance Policy Loan Spread
An important caveat to the dynamics of life insurance policy loans and the fact that if the value of the loan reaches the total cash value of a policy it can cause the life insurance to lapse is that even if no payments are being made on the loan and its balance compounds , the cash value as the underlying collateral of the loan continues to grow as well.
After all, the life insurance policy loan is still nothing more than a personal loan from the insurance company, using the asset value of the life insurance as collateral. Which means the cash value itself is still an asset of the policyowner, and remains invested with the potential to grow just as the value of the underlying real estate can continue to grow, even though theres a mortgage against the property.
But in the context of life insurance where the value of the asset can grow almost in line with the balance of the loan, even when no payments are made on a life insurance policy loan it can take a significant amount of time for the compounding loan balance to erode the net equity of the policy and ever trigger a lapse of the coverage. Or viewed another way, determining how long it will be until a life insurance loan causes the policy to lapse is based on the net borrowing cost , not just the stated borrowing rate on the loan.
Find Cheap Life Insurance Quotes In Your Area
It’s easy to borrow against the cash value of a permanent life insurance policy. There aren’t any loan requirements or qualifications and the funds can be used for any purpose and paid back whenever you decide, plus a life insurance policy loan has relatively low-interest rates. The downside? If you default on paying the interest on the loan, you could lose your policy , and end up with a big tax bill. Assuming you can keep up your payments, borrowing against your life insurance policy is an easy way to access cash.
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