Policy Loans Have Low
Life insurance collateral loans typically have lower interest rates than you would get with a personal loan or credit card. While rates vary, they typically fall within the range of 6% to 8%, again depending on who holds your insurance and your policy. To illustrate, we collected loan interest rates for variable universal life insurance policies from three of the largest insurers:
|Variable Universal Life Protector||2% if the policy has been in place less than 10 years, else 1.05%|
Your cash value continues to earn interest during the loan. This may either be at a fixed rate or within a particular spread of the loan interest rate. For example, if your cash value were guaranteed to grow at a rate within 2% of your loan interest rate, which was 6%, it would be guaranteed to be at least 4 percent.
Withdraw Money From The Cash Value
Your policy may allow you to permanently take the money out of your permanent life insurance policys cash value. This has profound impacts, though, and should be very carefully thought through before you do it.
Withdrawing money from the cash value youve built up may seem like a smart move. You did pay money and purchase a permanent life insurance policy partially to build cash value. Sadly, it has other impacts that may defeat the purpose of this part of your policy.
In particular, permanently withdrawing the money from your cash value could lower your policys death benefit. In fact, some life insurance policies reduce your death benefit by more than the amount of cash value you receive. This could leave your loved ones without the money you intended to leave them when you took out the life insurance policy.
You should always check your particular life insurance policy for details to see how this would work in your situation. The impacts may be minor enough where its the best option for you. In other cases, you may find yourself considering another way to access your policys cash value.
You Have A Variable Life Insurance Policy
Variable life insurance is a type 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.
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Unpaid Portions Of The Loan Can Also Reduce Other Benefits
When you buy life insurance, you have the option to add an accelerated death benefit rider, which lets you use part of the death benefit to help pay for your care if you become critically ill. If you have an unpaid policy loan balance, it can reduce the amount youâre allowed to take from the accelerated death benefit.
Additionally, any unpaid loan balance could reduce the amount youâre owed in dividends if you were otherwise eligible to receive any. That means you will have less money to withdraw from the policy if you just want straight cash.
Is It Worth It To Have A Permanent Life Insurance Policy If I Know Im Going To Need A Loan
Many insurance experts recommend considering term policies before whole life insurance policies, but its important to speak with a licensed insurance agent to determine what type of policy will work best for your individual needs. Term policies cannot be used for a loan, but these policy types are cheaper than permanent policies, which may help the insured save money and take a smaller loan from another source, such as a bank.
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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.
Use The Cash Value To Pay Your Policys Premiums
People usually want to access their policys cash value to pay an unexpected expense or regular bills when their income dries up. People dont consider that their life insurance policy is one of the bills they use their money for. If they can avoid paying their life insurance bill, they could instead use the money they would have used to pay their life insurance premiums for unexpected expenses or other bills.
Some permanent life insurance policies offer this option. In some cases, you can use part of the cash value to cover your premiums for a few months.
Another option is getting rid of your premiums altogether. This is often referred to as making the policy paid up. Essentially, it takes the cash value of your policy and uses it to alter your life insurance policy.
Based on the dollar amount of the premiums youve paid and your cash value, your insurer will offer you the option to alter your death benefit in exchange for never making premium payments again. This could drastically reduce your death benefit.
Some people may have more death benefits than they need, though. If reducing the death benefit fits within your needs, you could keep the reduced death benefit and never make premium payments on the policy again.
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Understand The Terms And Conditions Of Credit And Loan Insurance
The terms and conditions of credit and loan insurance can vary depending on the insurer. The terms and conditions will also tell you what type of claims you can make. Make sure you understand the terms and conditions before you sign up for credit and loan insurance.
Depending on the type of credit and loan insurance you get, the terms and conditions will tell you:
- the maximum benefit that can be paid
- for critical illness coverage, the specific conditions covered by the insurance policy
- for disability coverage, the definition of disability
- for job loss coverage, whether youd qualify for a job loss benefit if youre self employed
Theres also usually a minimum number of hours you need to work to qualify for a job loss or disability benefit after you lose your job or become injured. For example, if you are a student you may not need job loss insurance on a loan or credit card if you dont have a job.
There are important exclusions on credit and loan insurance that determine if your claim will be approved. Exclusions are conditions or circumstances that arent covered by your insurance policy. For example, pre-existing conditions, such as heart disease, asthma, or high blood pressure may not be covered.
Even once youve been approved, not all claims will be paid.
For example, depending on the type of insurance, a claim might not be paid if:
If you have any questions, contact the insurance company before applying for credit or loan insurance.
The Problem With Trying To Bank On Yourself With Life Insurance Policy Loans
Recently popular life insurance loan strategies like Bank On Yourself and Infinite Banking rely heavily on the idea that when an insurance policyowner borrows from a life insurance policy, they are borrowing from themselves, often at a very low net loan spread. Some even have the potential that the underlying cash value may outearn the borrowing cost anyway .
And while Bank On Yourself is “legit” in that borrowing and repaying life insurance loans is a way to tap the cash value of a life insurance policy without surrendering it, the big caveat to these scenarios, as discussed earlier, is that ultimately someone who takes out a life insurance policy loan isnt actually banking on yourself at all. The reality is that its just simply taking out a personal loan, not unlike a credit card loan, a mortgage, or a P2P loan, for which loan interest will be paid. The difference is simply that the loan happens to come from a life insurance company, and can be done at a relatively appealing rate of interest thanks to the cash value of the life insurance serving as collateral for the loan. Still, the borrower is really doing nothing more than taking out a personal loan and racking up loan interest while using their cash value life insurance as loan collateral! In other words, a life insurance policy loan isn’t “banking on yourself” any more than taking out a home equity line of credit is “banking on your house”.
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What Is A Life Insurance Policy Loan
Policy loans are available on most permanent cash value life insurance policies. Policy loans are not the same as other loans: Policy owners are not required to repay the loan. Keep in mind, the insurance company will charge interest on the policy loan.
When you borrow money from your life insurance policy, you are borrowing your own money. It is essentially an advance of money that could be received from the policy either through a surrender of the policy or the payment of the death benefit. It is money that you, or your beneficiary, would have received anyway. The policys cash value acts as collateral for the policy loan.
If you never pay back the policy loan during your lifetime, the amount is deducted from the death benefit when you pass awaymeaning that your beneficiaries repay the loan.
In Board of Assessors v. New York Life Insurance Company , U.S. Supreme Court Justice Oliver Wendell Holmes wrote: The so-called liability of the policyholder never exists as a personal liability, it is never a debt, but is merely a deduction in account from the sum the plaintiffs ultimately must pay.
How Much How Soon
As cash value builds in a whole or universal life insurance policy, policyholders can borrow against the accumulated funds. Life insurance policy loans have one distinct advantage: The money goes to your bank account tax-free.
Insurers generally make no promises as to how fast or to what extent the cash value will increase. So its hard to know exactly when your policy will be eligible for a loan. What’s more, insurers have varying guidelines outlining how much cash value a policy must have before you can borrow against itand what percentage of cash value you can borrow.
Your policy is likely to have sufficient cash value to borrow against “typically after the 10th year the policy is in force, says Richard Reich, president, Intramark Insurance Services, Inc., a life insurance agency in Glendale, CA. Something else to know: This loan isn’t taking money from your own cash value. You are actually borrowing from the insurance company and using your policys cash value as collateral, says Reich.
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Can You Borrow From Your Life Insurance Policy
You can typically take out loans against permanent life insurance policies, but not term life insurance policies. Life insurance loans use cash value accounts as collateral. Term life insurance policies do not come with a cash value account, so policyholders cant borrow money from their insurer against these policies. A term policy has only one financial considerationthe beneficiarys death benefit if the insured person dies during the policy term.
Permanent life insurance, such as whole life, is another story. With whole life insurance, a portion of your premium payment will go toward the death benefit, while another part will go into a cash value account that builds value over time.
You may be able to take out a loan from your insurer and use your cash value account as collateral, but enough money will have to have accumulated in the cash value account first. For this reason, you may not be able to take out a loan against a new policy. In addition, if you fail to pay back interest on the loan, the amount you owe could be deducted from the death benefit if youve taken out enough money and not repaid it. Policy lapses are bad news if your family is still planning to rely on your life insurance policy.
Five: Pay Less In Taxes
Taxes are a fact of life. Many of us dont want to pay any more in taxes than we absolutely have to. Life insurance offers tax benefits. Both term and permanent policies will provide your beneficiaries with a typically tax-free death benefit when you die, per IRC §101.
While youre living, you can take income tax-free loans from the cash value of your permanent policy.1
History Of Whole Life Insurance
From the end of World War II through the late 1960s, whole life insurance was the most popular insurance product. Policies secured income for families in the event of the untimely death of the insured and helped subsidize retirement planning. After the passing of the Tax Equity and Fiscal Responsibility Act in 1982, many banks and insurance companies became more interest-sensitive.
Individuals weighed the benefits of purchasing whole life insurance against investing in the stock market, where annualized return rates for the S& P 500 were, adjusted for inflation, 14.76% in 1982 and 17.27% in 1983. The majority of individuals then began investing in the stock market and term life insurance, rather than in whole life insurance.
How Much Life Insurance Do I Need
If your goal is to establish an inheritance for relatives or leave an amount for charity, you would need to buy the amount necessary to reach those goals. Each situation differs, but many people want to leave enough through a life insurance policy to maintain the support currently provided for dependents. To help determine the amount of life insurance you will need for this purpose, financial experts typically recommend factoring in other sources of income that will support your dependents, such as Social Security or investments.
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What Is A Policy Loan
A life insurance loan is money that you borrow from your life insurance policy. It is similar to a traditional personal loan in some ways, but life insurance policy loans are only available with life insurance policies that have a cash value component. Cash value is commonly found with permanent life insurance policies.
When you take a life loan, also called a loan on life insurance, the policy loan money can be used for anything. You can use the funds to pay for a childs college tuition, make a down payment on a new home or pay for other financial obligations. Usually, the money can be accessed quickly and is often used to pay for emergency expenses.
How Does A Life Insurance Loan Compare To Personal Loans
At 5% to 7% interest per year, a life insurance loan is cheaper than most personal loans. Not only that, but life insurance loans give you a flexibility of repayment that personal loans cannot.
However, because the amount of a life insurance loan is based on your policys cash value, there is a chance you may not be able to loan as much compared to a personal loan, which depends on your monthly salary.
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Find Out If You Have Credit Or Loan Insurance
You must agree to sign up for and be enrolled in credit or loan insurance.
You can find out if you have credit or loan insurance by:
- checking your files for a copy of the certificate of insurance
- checking your bank statement for a debit related to the insurance premium payment
- checking your credit or loan agreement for information about optional services
- asking the financial institution, or other business where you took out your loan or credit card, if you have it.
What Does Mortgage Protection Insurance Cover
When you take out a mortgage, you’re likely to receive offers of mortgage protection insurance. The offers may come from your lender or from independent insurance companies.
With mortgage protection insurance, if you die, the insurance is paid directly to the lender to pay off the loan. That differs from traditional life insurance, which makes payment to your beneficiary, and they can allocate the money as they see fit.
Mortgage protection insurance is different from private mortgage insurance , which you may be required to buy as a condition of your loan if you put less than 20 percent down on a house. PMI doesnt pay off the mortgage it pays the lender if you fail to make your payments.
Some mortgage protection insurance benefits gradually decrease over time. Ostensibly that’s tied to the declining balance of your mortgage.
You also may see your premiums change over time. So you run the risk of premiums increasing and the payout decreasing.
You also may be offered mortgage disability insurance or mortgage unemployment insurance to cover your payments because of disability or job loss. The money will be paid directly to your lender. With traditional disability insurance, you receive compensation if you’re unable to work for a certain period of time.
You may be offered similar types of life, disability and unemployment coverage if you take out an auto loan, open credit cards, or take out a personal loan.
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