Life Insurance

How much of your own money would you like to borrow? Sounds silly doesn’t it? Borrowing your own money!

But that’s exactly what we’re talking about when we say borrow money against your life insurance policy because a policy loan can only be made against cash value you have accumulated in your insurance contract. You are certainly not borrowing against the so called death benefit i.e. the face value of the policy. The insurance company is not going to lend you money against that. After all the company is betting it will never have to pay that death benefit. Its bet is you will stop making payments and cancel the policy before you die.

No. The company will only loan you money collateralized by the cash value you have built up in the policy.

Very simply there are only two kinds of life insurance contracts: whole life and term insurance.

Whole life is called permanent insurance because it is the kind of insurance policy that people keep until death. Term insurance meets the contingent needs of a person’s estate for a period of time.

For example: when you are relatively young i.e. aged 25 to 55 you may have a family that would be seriously affected by your sudden and unexpected demise. If you died prematurely the lives of your spouse and children might be tragically impacted. Where’s the money going to come from to pay the mortgage? How is your spouse going to support the children without your income? Where is the money going to come from to send those kids to college? These are important considerations throughout that period.

However these are temporary issues. Once the kids are raised and finished with their education the need for that big immediate estate created by owning a big insurance policy is gone. There is no need to have this insurance anymore. This is why people buy a lot of term insurance in this period of their lives and later drop it.

Whole life serves an entirely different purpose. Your estate is always going to need a certain amount of insurance from which to pay for your interment and other final expenses such as uninsured medical expenses associated with your final illness. As well there are expenses not usually associated with or contemplated in anticipation of death. Few people give any consideration to the impact of grief on the earning capacity of the surviving spouse. It may be more than a few months before the spouse can return to gainful employment. There may also be travel and transport expenses for your body or of other family members. These costs should be insured with a permanent i.e. whole life policy.

Term insurance premiums only cover the mortality and other costs of the policy. Mortality cost is computed by people known as actuaries and it is simply a calculation of how many dollars per thousand dollars must be reserved against the possibility that a person your age is going to die this year. Other factors in addition to age considered by the actuary are: sex (women live longer than men) occupation, lifestyle and the state of your health when you purchased the policy.

With term insurance the premium covers: commission costs, mortality costs administrative expenses, overhead and profit. There is nothing left over. Term insurance is not an investment. It is essentially a hedge against all the other liabilities your premature death would precipitate.

Whole life has some aspects of an investment. Each premium paid is in some measure in excess of all the other costs of the policy. The excess is segregated into an account with a name that connotes the cash surrender value of the policy. It is this cash surrender value that is invested. The form of the investment may be: a loan to the insurance company itself and the company pays some stipulated rate of interest or a variable account which might even be a mutual fund of stocks or bonds. The return on these investments is also credited to cash surrender value.

It is this cash surrender value that you may borrow against. It’s your own money in the cash surrender value that is the collateral for the loan. It’s good business for the insurance company too. It’s charging you more interest on the loan than it’s paying you on your cash value. It’s also a tax free source of cash because the proceeds of a loan is not considered income by the IRS.

Therefore you may borrow a sum against this collateral and if you choose you don’t ever have to pay it back. All you have to do is keep making the premium payments on the policy. Indeed it is entirely possible that you can build up enough cash in the policy that you no longer have to make premium payments. The earnings on your cash value can grow to be more than sufficient to meet the needs of maintaining the policy.

Borrowing against your cash surrender value is very easy and can be done in a relatively short period of time. The provisions for doing this are in your policy but you can also call your agent and he/she will provide you with the necessary forms and facilitate the processing of the loan. Don’t be shy about calling your agent. He/she made a lot of money when you bought the policy and he/she is still collecting residual commissions every year your whole life policy remains in force.

Commissions paid to the selling agent significantly impact the policy in the early years. Not that you care, one hundred percent or more of your first year’s premium on a term insurance contract is paid to the agent as commission. The commissions on a whole life contract will also substantially consume the first year’s premium on a level payment contract and the agent may still be making five to fifteen percent of the level payment premium on a whole life policy throughout the life of the policy. Such percentages do not apply to contracts that are paid up in a number of years certain. A level payment contract assumes the same annual premium will be paid throughout the life of the policy.

So, if you really need some money go ahead borrow against your cash value in your insurance policy. It’s really no different than borrowing from a bank where you have a CD. In fact it’s probably cheaper!