What You Need To Know About Taking A Loan Against Your Permanent Life Insurance Policy
Every type of coverage has its own unique set of advantages and disadvantages
. One of the main benefits of universal life insurance is the ability to withdraw money from your insurance account without paying interest on it.A Look At Universal Life Insurance
Universal coverage is unique because it offers coverage throughout your lifetime but with more flexibility than whole life. A universal policy provides far more than the death benefits available from other varieties because a universal plan involves an account held by the policy owner. All life insurance fees are debited from this account, but it can also be used as a form of savings. It accrues interest just like a typical savings account, and can be withdrawn from like a savings account as well.
The key difference between whole and universal life insurance is the way in which premiums are paid. In whole policies, one set premium is paid throughout the entire existence of the policy. There is no variation; provided those conditions are met; the policy is guaranteed to offer the expected benefits at the expected time. With a universal option, there is more flexibility. Because it is account based, you have the option to pay any amount toward the coverage provided. You may pay whatever you choose. Although this offers you much more freedom, it also requires that you maintain the account. For example, if the amount in the account ever runs empty, your coverage will lapse. Fortunately, many companies can provide a no-lapse rider that makes this a nonissue, though the rider removes the flexibility of payment, as well as the power to withdraw money from the policy.
Borrowing From Your Policy
Taking money out of your account to spend is a simple process. You merely decide how much you want to take out, and it's yours. Universal life insurance is the only type of policy which gives you this freedom. You do not need to take out a loan to cover it. You don't need to pay interest. You simply withdraw, and you have the money instantly. However, withdrawing can drive your balance below the necessary level to maintain your coverage unless you have purchased an additional coverage guarantee.
The advantage to this kind of withdrawal is that there is no interest charged. If you have substantial cash value in your account, then you will be able to withdraw a large sum. You should be able to easily cover most minor expenses with the amount and never have to worry about added interest.
A Loan On Your Coverage
The loan option is slightly more complex. There are actually two types of loans that can be obtained on a universal life insurance policy. The first is an actual loan on the policy, where interest would be paid to the company from which you bought the policy. It is a fairly straightforward process. Your cash value account is the source of your loan funds.
In this case, interest is the only element of the loan that absolutely must be repaid. This is because the company would have been investing your money had you not withdrawn it; in essence, you are repaying the company for their lost investment income. However, the actual cash value of the loan is yours to replace or not as you see fit. If the money is not replaced, then the death benefit will decrease by the amount withdrawn. In some cases, this decrease may be acceptable. Consult with a financial planner and a universal life insurance agent.
A Loan Using Your Coverage As Collateral
The other option is to take out a personal loan using the universal life insurance policy you have as a form of collateral. The process for this is more complicated than a loan through the company that issued the coverage, but it is doable. This is known as a collateral assignment. It places the bank to which the policyholder is indebted as part- or full-owner of the life insurance policy in the event that the debtor fails to make the required payments. The other heirs would still receive the rest of the payout, but the bank would be guaranteed a payment.
Qualified Assistance For Financial Planning
Understanding universal life insurance is a difficult task. Your basic knowledge will help you conceptualize ways to make your policy work for you. Always consult with a specialist before making a big decision. Loans can adversely affect the benefits your coverage provides, hurting those that the policy is meant to protect. Make an educated decision before you take out any loan or withdraw cash.
SEEK INDEPENDENT ADVICE. All information expressed in this article is intended to be general information only. You should not rely upon this general information to make legal, tax, investment, estate, or financial planning decisions. No portion of this article is intended to nor does it provide legal, tax, investment, estate or financial planning advice. For this type of advice, you must consult an independent advisor.
What You Need To Know About Taking A Loan Against Your Permanent Life Insurance Policy
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