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Borrow Against Whole Life Insurance
Life insurance policies that accumulate cash value can help individuals meet both short-term goals and emergencies financially. While term coverage cannot build cash value, whole and universal life policies accumulate savings that can later be borrowed against to meet any unexpected costs or emergencies.
Policy loans tend to be approved quickly without needing a credit check and their interest is often given at a more than reasonable rate.
We at Denis Doulgeropoulos – Omega Investments offer different life insurance plans.
How it Works
Whole life and some universal life policies offer an unusual but powerful feature – borrowing against their policy for educational expenses or mortgage payments when cash flow is tight. Borrowing against one of these policies is an invaluable option that provides families with the cash they need without draining away all their savings at once.
Life insurance loans use the cash value as collateral, making the process quick and simple, usually without needing a credit check or approval before borrowing money against it. Furthermore, interest rates charged tend to be far less than home equity or personal loans.
Borrowing against life insurance comes with its own risks. If you fail to repay the loan within an agreed-upon timeframe, its amount will be subtracted from your death benefit and could ultimately cause the policy lapse – in this event, only its remaining cash value would remain with its owner.
Whole Life Insurance Versus Term Life Insurance Information & FAQs
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Pros To Borrowing Against Your Whole Life Insurance Policy
Life insurance policy loans use the accumulated cash value of whole life or universal life policies as collateral, without typically requiring an application process or credit check – often resulting in lower interest rates than traditional bank loans or credit cards – though the accumulated interest on such a policy loan can reduce its death benefit.
According to Experian, one advantage of policy loans is their potential not to negatively affect your credit score. This feature is especially advantageous if your credit has been affected or other loans were turned down for.
policy loans can be hazardous if not paid back on time, leading to accrued interest surpassing your policy’s accumulated cash value and possibly leading to its cancellation. Therefore, it’s crucial that a plan be developed to repay it on time – it would be prudent to request an in-force illustration from your life insurer every one or two years to see exactly how much the loan has cost; failing that, they will deduct its cost from your death benefit as they would like recouped from you directly by the insurance company directly.
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Cons To Borrowing Against Your Whole Life Insurance Policy
Whole life insurance offers many consumers a means of borrowing against its death benefit, yet it should be remembered that any amounts borrowed exceed it and cause its value to diminish over time.
Borrowing against life insurance won’t have an adverse impact on your credit score since your policy acts as collateral; however, repayment is key as interest accrues and failing to do so could cause your policy lapse.
Most whole life policies offer policy loans with an easy approval process and simple requirements, such as filling out a simple form and verifying your identity. Unfortunately, however, taking out such a loan reduces your death benefit and will likely come with an interest rate that can be significantly higher compared to traditional personal loans.
Every so often, it is wise to request an in-force illustration from your insurer in order to assess how your loan has affected the policy’s performance and reduce any unpleasant surprises in the future. Doing this will ensure that any borrowed amounts will be fully repaid before passing away.
Taxes
Life insurance policies build cash value over time and may offer loans as a means to cover larger expenses like college tuition or unexpected emergencies. But be mindful of the fact that the IRS considers loans income; any borrowed amount plus accrued interest will be deducted from both your death benefit and surrender value should you surrender the policy.
As loan balance and annual interest erode your policy’s cash value, they could eventually cause it to lapse, forcing your beneficiaries to pay income taxes on both the death benefit and any remaining cash value. Therefore, it’s imperative that you monitor and make any necessary payments promptly – this ensures the maximum life insurance protection.
Although cash-value life insurance loans offer unique features for creating leverage, you shouldn’t rely on them solely to create leverage; other alternatives may offer better loan terms and more investment flexibility.
Lapsing
Whole life and universal life policies are the only types that build cash value, as well as offering flexible loan repayment terms with low interest rates. Unfortunately, they’re at risk of lapse if their outstanding loan balance with accrued interest exceeds their cash value, in which case beneficiaries would instead receive their policy’s cost basis–an amount equal to premiums paid on a taxable basis–instead of its death benefit, leading to potentially substantial income tax bills for them.
As with any loan, life insurance loans should only be borrowed against in emergencies where sufficient cash value exists in your policy. Keep an eye on your outstanding loan balance, and request an in-force illustration from your insurer every one to two years to monitor performance. If unsure whether a life insurance loan is the best solution for you, consult a financial advisor or