Should you Borrow against your Life Insurance

Some policies are better than others when it comes to borrowing against the cash value or CV of the policy. Some policies have “preferred” loans and wash loans, and yes the money doesn’t actually come out of your policy but the insurance company reserves. Generally speaking UL’s have better loan features or more flexible then the WL, yet either way it is always better to take a loan versus cashing in the policy, if you cash in the policy you’ll owe taxes on any amount above your basis or what you have placed into the account. Some UL’s have preferred loans as low as 2% above the tenth year of the policy which is dirt cheap money!

Now you also have an option with UL’s, if you are going to borrow the money and don’t want your DB to decrease in the case you die or never pay back the money is to switch the DB. UL’s generally have several DB’s to choose from and yes you can change them at any time. You have Option A, which is the face amount, say you have a face amount of 100 grand that is what you DB would be.

Now you also have option B which is DB (the 100 grand) plus your cash value. Now you can also get option C in some plans which is DB plus all premiums you paid in. Now the weak point with UL’s is that if you remove the cash value you Premiums are likely to go up unless you have a strong Secondary Guarantee of the DB, some have good wording others do not, you have to read your Policy to find out! Or have someone like an experience Agent or Financial Planner familiar with Insurance Contracts.

Now the whole life, yes it does not have the flexibility generally speaking that of the UL, no duh that is what UL’s are all about, flexibility. Yet, you can only borrow so much from any policy, generally 90% of the CV. Yet with the WL Policy your Premiums will never increase no matter if practically all your CV is borrowed. That is the strength of the WL Policy, Certainty of the Premium! Plus the most common type of WL policy is set up with PUA (Paid Up Additions) found use in a lot of participating WL policies. Basically your initial DB climbs with the CV of the policy but your premiums never go up.

So if you are at an age and your insurance needs decreases, I see no reason why taking out cash is a bad idea. This is why many will buy CV Insurance. Once they reach a certain age and other money such as retirement savings starts to run out you have the cushion of the cash value of your WL or UL policy that can be taken out tax free in the form of a loan. And yes if the DB at age 70-80 or older doesn’t matter then you never worry about paying back the loan, it is a good fall back if your 401 or other savings start to dry up, many are expected not to have enough or even planning to have enough if they live as old as some mortality tables are showing!

One warning, do not fall into the idea of having a cheap UL (low premiums) and ever expect it to perform like a solid participating whole life from Mass Mutual, NYL, guardian etc etc, it can not be done! UL’s are more expensive to keep up as in the Flexibility, if you fund it less then a solid Par WL you can not expect to see the Value grow. It is the meaning of TINSTAAFL or “There is no such thing as a free lunch”.