Those of us who have been fortunate enough to have secured steady employment soon consider stepping up our lifestyles. Some may want a home of their own, or a car to get to work in and to pick up groceries. Sometimes we may have some of these expenses already and may need to pay for an unexpected repair or badly needed upgrade. In these instances that Life Insurance policy you bought when you started working may provide the assistance you need.
The permanent life insurance policy can provide a source of cash in the form of a loan against the policy. The payments you've made into the policy since it was purchased make up the policy's cash value. Remember however. if you fail to pay back the loan, with interest (4%-8% possibly compounded! ) the amount borrowed will be deducted from any pay out to your beneficiaries upon your demise. The trick, it seems to me is to purchase and pay into your life insurance policy early in the game. It may save you in more ways than you think.
Here are a few quick pros and cons of borrowing against your life insurance policy
Pros:
- Easily accessible- you can generally obtain assets within 5-10 business days.
- High percentage available-You can usually borrow up to 95% of savings
- Low interest rate- generally lower than most bank loan rates (4-8%)
Cons:
- Lower amount available to you/beneficiaries- as you borrow there is no obligation to pay money back. The borrower is only responsible for interest and dividend expense. With that said the more borrowed, the less that will be inherited by heirs.
- Potential Tax impact- if you borrow more that you actually saved a taxable event can trigger
- Penalty for failure to pay interest- If interest is not paid timely, it will be compounded.
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