Should You Borrow Against Your Life Insurance Policy?by Evan Beecham on 02/24/16
“Most people do
not become rich because they fear the power of leverage.”
One of the advantages of a Whole Life Insurance policy is the ability to borrow against your cash value, though the concept is widely misunderstood, even by insurance agents! In this post, we’ll explore exactly what it means to take a loan against your insurance policy, and we’ll look at some good reasons – and bad reasons – to borrow against your policy.
Do You Borrow Your Cash Value, or Borrow Against It?
A common misunderstanding is that people think they are actually borrowing the cash value itself, but actually, they are taking a loan against it. Your cash value is the collateral that the life insurance company lends against. So the real choice you have is to either reduce (or liquidate) your cash value, or borrow against it.
The cash value is your savings to take as you wish, but we recommend that you borrow against it rather than deplete it. Why? Just like with a house or other piece of real estate, it is usually more advantageous to keep the asset long-term and borrow against it (for example, with a mortgage) than lose the asset.
Just as with a rental home, properly structured whole life insurance policies allow you to retain the asset for future use. Real estate investors may borrow against and pay off mortgages several times against a long-term rental, and you have the ability to do the same with your cash value policy.
Just like real estate, cash value policies allow you to have a C.L.U.E., which stands for
Control – you control the asset, not your employer or the government.
Liquidity – it can be liquidated if desired, with no penalties and minimal taxes.
Use – different from a retirement account, the money can be used as you please, including used as collateral.
Equity – the asset grows over time and your net worth increases.
Good Reasons to Borrow Against Your Life Insurance Policy
Perhaps the most common reason people borrow money is in reaction to a cash flow crunch, perhaps caused by illness, divorce, or a temporary period of unemployment, But there are many good, strategic reasons why you might want to borrow against your whole life policy, even if you are not having a financial emergency.
For instance, it can be a smart way to leverage your savings to pay off or avoid consumer debt. It can be a way to increase your net worth or cash flow by providing capital to invest in real estate, or financial instruments with solid double-digit returns. It can be a brilliant strategy to use to supplement retirement funds or social security in later years when you are no longer working full-time.
Some not so good reasons to borrow against your cash value:
Nordstrom is having a sale. You never want to borrow money for non-essential, depreciating consumer purchases. And living beyond your means is also not a good reason to take a loan against a life insurance policy!
You got a “sure fire” tip about a hot stock. Borrowing
money to gamble is always a bad idea, whether it’s Vegas or Wall
Street. You never want to borrow money on a prediction, a hunch, or a
guess. When it comes to money, it’s important to deal with facts
Stay tuned for a follow up… Next week, we’ll look further at some advantages and disadvantages of borrowing against a life insurance policy.
Can we help you evaluate your own life insurance policy?
We find that people have a lot of questions about their policies:
“Do I have enough insurance?”
“What will be the impact of borrowing against my policy?”
“Is this a ‘good’ policy with the proper riders, or is it the kind of permanent insurance that has gotten a lot of bad press?”
“How can I use my whole life insurance to benefit my family now?”
If you have questions, we can help you get them answered! Beecham Financial Services is once again offering complimentary policy reviews. Just click here if you would like to schedule a no-obligation appointment with us to review your policy.
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