Life Insurance You Can Borrow From
As a popular plan, whole life insurance is usually the most requested type of cash value life insurance
. The question is, is it the best plan to use if someone needs to borrow from the policy? In most cases no! As you may know, whole life insurance is one of the most inflexible type of cash value life insurance. If your plan is to be able to borrow from an insurance policy, the better choice would be universal life insurance.
Why universal life? Simply put, it is because it is more flexible and less restrictive when it comes to taking money from the policy or even adding money beyond basic premiums. In some cases, these policy can even be used as savings account. That is, after the surrender period (which can take a few years).
Keep in mind that if you borrow from a universal life policy, a high interest may apply. Make sure to check on the interest rates and the interest credited to the policy before you borrow. In other words, what is your net cost for borrowing from the insurance policy? One advantage of borrowing as opposed to an outright withdrawing, is that you should not have to pay any taxes on the the money borrowed. Again, the disadvantage is cost. If you decide to withdraw money (not borrow) there should be no fee or a very small processing fee. Problem is, the money withdrawn may be taxable. The insurance carrier should be able to advise you. If not, call your accountant. In many cases, as long as you do not take more than was paid into the policy in basic premiums, then, if you withdraw from the insurance policy (not borrow) no tax should be do. Please check!
Amongst universal life insurance policies, there are many plan options. Which is best if you need to borrow? With basic universal life, your only concern should be interest and fees. Since the policy just pays a basic interest rate (declared yearly) then it would be like borrowing from a savings account. Indexed life is a bit different. Because indexed universal life insurance is tide to an index, if you borrow from the policy, potential gains may be lost for the year in which you borrow. That loss should only affect the amount borrowed though. Some companies may consider that, since you only borrowed the money and did not do an outright withdrawal, then the index gain for the year will not be affected. Be sure to check as the loss in some years can be substantial. Another popular universal life policy is variable life. Although it seems similar to indexed life insurance, it is not! variable life insurance offers many investment sub-accounts and that can make things even more complex when it comes to borrowing money. Since the sub-accounts are usually mutual funds or other types of equities, borrowing from these policies can lead major account loses. In other words, if you do not check first, you could end up taking money out of one of the sub accounts that has sustained major losses for that year. Most times, with variable universal life, it is best to borrow from one of the accounts that does not or fluctuates very little. An account that is not too affected by stock market moves (ie: money market account or basic interest account)
One more type of life insurance policy that, occasionally, offers you the ability to borrow money is the Return of Premium term life insurance (ROP Life Insurance). That type of insurance policy is very similar to the basic universal life plan except that the "cash value" is guaranteed. make sure that, if you do borrow for this type of policy, that you will allowed to put the money back into the policy when you are able to.
In all cases, if you are going to borrow from any life insurance policy, request a full proposal showing the effects of the borrowed money on the insurance policy. Borrowing can be great, but if you need your life insurance policy to last you for a certain period of time, you want to make sure that your decision to borrow from a cash value life insurance the policy does not affect it main function - that is to pay out a death benefit when it is expected. In other words, if you borrow too much money from a life insurance policy, it may cause it to lapse prematurely or you may need to make unexpected (and unfortunate) adjustments to the face amount in order to keep the policy going. We strongly recommend that, when you order a proposal showing the effects of the borrowed money, you also request a proposal showing what it would take to repay the loan(s) so as not to lapse your insurance policy prematurely.
We hope this article was helpful. in all situations and as we say on all of our articles, make sure to ask, ask and ask again many questions before you take action. Be well!
by: Michoel Philippe Deray
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