Borrowing Against Life Insurance Policies
When the current economic growth drags and your resources are hitting the all time low, borrowing from life insurance can seem a smart option. There is just a constant search for cash to fund all of life’s necessities and utilities. To survive these hard financial times, one is forced to think of borrowing from life insurance without the troubles of getting pass all the lenders’ requirements. Borrowing from life insurance is an easy way out of your money miseries, or is it?
Before you even think of borrowing from your life insurance, you must consider the fact that not all insurance agents will be giving you complete advice on your decision. Thus, you may end up having a loan that’s more complicated and expensive than any other types of credit. When borrowing from life insurance, people fall into the trap of thinking they’re paying interest for their own benefit. There is nothing for free when it comes to insurance policies. The truth is that you’re putting the cash value of your insurance policy as a collateral when you are borrowing from it. On top of that, the interest rate of this loan is not subject to a tax deductible. You may not pay back the loan and heavy consequences will come on the time of an insurance claim.
Life Insurance Need to Knows
Before you fill out that form, here are important things you have to consider when borrowing from life insurance policies:
1. Set a limit on the amount that you will borrow. The amount of your life insurance vary depending on the benefit options you have chosen. Know the accumulated cash value of your life insurance policy and never borrow more than that.
2. Consider how much you or your dependents will be getting when the time comes to file for a claim. Just in case you weren’t able to settle your loan in time, make sure to calculate how much will be deducted from the insurance payment that will be made to you/your dependents when the time comes.
3. Determine how long it will take for the loan to be processed. The best thing to do is call the insurance agent when borrowing from life insurance policies, specially if the money is needed for an emergency situation.
4. Forecast the interest rate. You must have a realistic outlook on what the yearly interest rate will be on your loan. Usually, it runs on seven percent. Many insurance companies will deduct the dividends earned by your policy when you borrow against it.
5. Your policy is your collateral when borrowing from life insurance. To protect their interest, reducing the dividend on your loan will give your insurance company a safety net in case interest rates rise in the future. Beware!
6. If your dividends will be reduced by borrowing from your life insurance policy, it is wise to pay off your loan as soon as possible, specially when it can greatly impact your policy’s earnings.
7. Only borrow when you need to fund something that will give you income or earnings to repay the loan, or you run the risk of shortening the life of your policy.
8. If you don’t feel like paying back the loan, pay the interest at least to lower the amount you owe. This will prevent interest rates to eat up your policy’s cash value until you are left with nothing.
9. You cannot borrow from a life insurance policy that has no cash value.
10. If in doubt, hire an insurance advisor that can give you an unbiased advice for making the best out of your loan.
Last Resort
Borrowing from life insurance should be the last resort, when all other loan attempts failed. There’s no need to file paperworks, show proof of income, or have a good credit score when borrowing from a life insurance policy, but without careful planning, you may end up losing more. Be money-savvy when using the funds you have for your future and those of your loved ones. The last thing you want is a heavy tax bill that will sink you deeper into a pool of debts.
RESOURCES:
Witt, Scott. “ On the Money: The Risks of Borrowing from Your Life Insurance Policy. “ September 2009. BizTimes.com.
http://www.biztimes.com/news/2009/9/18/on-the-money-the-risks-of-borrowing-from-your-life-insurance-policy
Solnik, Claude. “ LI Financial Experts: For Needed Cash, More Borrow Against Life Insurance Policies. “ February 2009. Long Island Business News.
http://www.allbusiness.com/insurance/insurance-policies-claims-insurance-premiums/11775953-1.html
Kristof, Kathy. “ Borrowing from Insurance. “2009. The Los Angeles Times.
http://www.latimes.com/business/investing/la-insure101-story8,1,5303026.story
InvestorGuide.com. “ Borrowing Against a Life Insurance Policy. “ 2009.
http://www.investorguide.com/igu-article-349-life-insurance-borrowing-against-a-life-insurance-policy.html
Rivero, Debbie. “ Need Cash? How to Borrow from Your Life Insurance Policy. “ August 2009.
http://www.yourkeyconsultants.com/blogs/debbi_rivero/archive/2009/8/19/need-cash-how-to-borrow-from-your-life-insurance-policy-important-info-please-read.aspx
