All life insurance policies give you peace of mind as they provide financially for your dependents and estate. However, you can use one type to build cash value that you can borrow against. Learn more about this option as you care for your loved ones.
Choose a Policy That Accumulates Cash
When you purchase life insurance, you can choose a term or permanent policy. Term life insurance covers you for a set time and pays a death benefit to your beneficiaries only if you die before the term expires. You cannot borrow against it, and you receive no cash payout when the term expires.
Permanent insurance, including whole and universal life, accumulates cash value that grows tax-free.
- Whole life is the most conservative of the three since it accumulates cash at the slowest rate according to a formula determined by the insurance company.
- Universal life accumulates cash value according to current interest rates, potentially increasing the return you receive.
- Variable policies invest in funds that are similar to mutual funds, and your policy’s cash value will vary.
How to Borrow Cash
Once your life insurance policy has accumulated a certain amount of cash value, you may begin to borrow from it. It can take 10 or more years to accumulate enough cash value so that your policy still has a death benefit.
You will pay interest on the amount you borrow, which will be little to nothing if your policy is a whole life one, but you pay no tax on the loan. If you die before you repay the amount you borrow, the remaining balance will be deducted from your death benefit.
Borrow from a universal or variable policy, and you may also owe an opportunity fee. It’s determined by calculating the difference between the guaranteed rate the insurance policy holder pays and the current investment rate. Add that difference to the loan’s interest rate to figure out the opportunity fee you will owe.
Consider the Pros and Cons
It’s certainly easy to borrow from your life insurance policy, and it’s relatively affordable. However, premiums for permanent life insurance policies are more expensive than those for term life. You also need to calculate carefully so you do not borrow more than your policy is worth and then have no death benefit for your beneficiaries. Remember that the amount you borrow is also subject to attachment by your creditors.
You can buy life insurance that accumulates cash value which you can borrow for almost any reason. For more details and to find out which life insurance policy is right for you, talk to your financial advisor today.
