Like with any type of loan, life insurance policy loans come with its own set of pros and cons. It is fundamental to check at both aspects before deciding whether to borrow against your whole life insurance policy or just wait and see as your life unfolds before your very eyes.
Read them below:
Pros of Policy Loans
Policy loans are quick and easy.
Getting life insurance is relatively easy and fast. There are no approval process, credit check or income verification when borrowing against your own assets. Most of the time, policy loans have a much lower interest rate compared to bank loans and they are not included in high fees and closing costs. In addition, they are tax-free in most cases. After you request the loan, a check is usually received in five to 10 business days.
Policy loans funds can be used in any way you choose.
Policy’s cash value acts as collateral for the loan, and that is the sole reason that you can use the money for anything from household bills to a vacation. The insurance company does not demand any explanation as to how you intend to use the funds. Unlike with a bank loan or credit card, there is no required monthly payment for a policy loan and no payback date. You can pay it the loan in two months or let it sit without making any payments for years. However, even if no payments are made, the loan accrues interest that is added to the balance of the loan.
Policy loans are not taxable income.
As long as the amount borrowed is equal to or lesser than the amount of premiums paid, it won’t be taxable. Since the loan is borrowed against your own assets and does not hit your credit, the IRS does not recognize the loan as income; therefore, it is not taxed.
Cons of Policy Loans
Policy loans is more expensive
A whole life policy cost considerably more than what you would pay for a term life insurance policy. This is because a chunk of the premium is used to cover the cash value accumulation feature. The larger the policy you buy, the greater the cost which stands to reason. Make sure you read the entire illustration or policy ledger and see the fine print in your policy for how long it’s guaranteed and any exclusion the policy may have. Ask for the opinion of your insurance adviser.
Policy loans has low interest rate
If you’re savvy with saving and investing money then this type of policy might not be the best way to go. The interest rate you earn on the cash value accumulation portion could be considerably less than if you invested it elsewhere such as a money market fund, the stock market or other interest bearing investments.
Policy loans lack of involvement in investing the cash value savings.
Although the money can still be made available to you via loans, the investment portfolio itself is entirely decided upon by your insurance company. And, as a rule, you can count on these investments to be very conservative. In turn, means that they’ll probably earn less than if you invested the money yourself.