What Is Life Insurance Loan?
Policy premiums are divided into an investment portion and a life insurance portion. Any payments made above the cost of the life insurance are invested as you have directed or the policy dictates. The cash value is a sum of the portion of the policy premium that was invested, plus any gains that have been accrued through investment returns. The investment portion may grow in either fixed or variable accounts, depending on the policy.
Each of the above life insurance policies will have a cash surrender value. This amount represents the amount cash value that has built up in the policy through both premiums and investment gains. The surrender value is the amount of cash that you can receive if the policy is cancelled. However, if you cancel the policy, you no longer have life insurance and you might find you are taxed on the gains that have accrued in the account.
Instead of cancelling the policy, the policy holder may also have the option of borrowing against the cash surrender value, up to 100% less an interest adjustment, instead of making a withdrawal. Generally, loan proceeds are not taxed unless you have a Modified Endowment Contract (MED), which would result in taxation.
While these loans do not require repayment, there can be significant consequences to utilizing these funds without a repayment plan. Meeting with your insurance agent, tax accountant or investment advisor before taking out a loan against your insurance policy, will ensure you understand all of the details of the loan.
Speak with a Financial Solutions consultant to discuss whether an insurance policy loan might create an opportunity to reduce or eliminate high interest credit card payments.
- Interest free loan.
- No requirement to pay back loan.
- No income tax liability.
- Can use the money for any purpose.
- High monthly payment.
- High and variable interest rates.
- High debt totals can hurt your credit over time.
- Lengthy time-frame to pay off.
- Could pay 2 to 3 times the amount originally charged.