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Life Insurance Loan Frequently Asked Questions – Bank On Yourself

DocuSign (DOCU) Q1 2023 Earnings Call Transcript | The Motley Fool

Life insurance began thousands of years ago as a way for the ancient Romans to have money to bury the dead, and over the centuries it has matured into a powerful wealth-building tool whose capabilities they go far beyond what the Romans could have imagined.

Much of the power and flexibility of modern life insurance products comes from the cash value that can be built up within a permanent life insurance policy.

Reading: How soon can you borrow from a life insurance policy

Cash value is the portion of the money in your life insurance policy that you can use before you die. No one has to die for you to take advantage of the living benefits of your life insurance policy!

These are some of the questions people ask about life insurance policy loans:

can you borrow against a term life insurance policy?

Generally, no, you cannot borrow against a term policy. That’s because typical term life insurance policies don’t build any cash value. Borrowing from a life insurance policy works because the insurance company uses your cash value as collateral for the loan. With no cash value on a term policy, you can’t get a loan against it.

On the other hand, the safest type of life insurance to borrow is a whole life policy, for reasons we’ll share in a few minutes.

can you get loans from life insurance policies other than whole life?

yes. You can borrow against any permanent life insurance policy. All permanent life insurance policies build cash value. whole life, universal life, indexed universal life, variable life, and variable universal life are examples of permanent life insurance policies.

Later in this article, we’ll explain why taking out loans against some of these policies can land you in costly trouble.

How much can I borrow from my permanent life insurance policy?

technically you are not borrowing from your policy. You are borrowing from the life insurance company’s general fund and using its cash value and death benefit as collateral. Typically, you can borrow against 85% – 90% of your cash value, depending on what the issuing life insurance company allows.

For more information, check out this article from our practical consumer guide to life insurance: “How do life insurance loans work? Which one is right for you?”

how soon can i borrow from my life insurance policy?

You can borrow as soon as you’ve built up a little cash value. With whole life policies, it can take several years to accumulate anything beyond a paltry cash value. however, with high-cash-value, dividend-early whole life insurance, such as “house bank” policies, you’ll typically have a cash value you can borrow against within the first month!

That doesn’t mean that borrowing against your policy early is necessarily a good idea, but it would be an option available to you if your circumstances warrant it.

How do life insurance loans work?

Here’s a quick overview of how life insurance policy loans work:

  1. You tell the company how much you want to borrow (up to the applicable limit) and where to send the money. you don’t have to fill out any nosy credit applications or even explain why you want the money.
  2. the company sends you a check or wire transfer within a few days.
  3. The company will charge you interest (usually at a very competitive rate; they do have your policy as collateral, after all), which will be added to your loan balance.
  4. If your policy is from one of the few companies that offer this feature, you will continue to earn exactly the same growth on your policy as if you had not taken out a policy loan. And if you pay off your loans at the interest rate the company charges, you’ll end up with exactly the same cash value as if you didn’t use your policy to finance things.

    For example, let’s say that at the end of year 25, your policy is expected to have a cash value of $400,000, if you haven’t borrowed against the policy. but let’s say that in year 5 you went into debt, to buy a car. And then let’s say you paid back the loan at the interest rate the company charged, over the next five years. at the end of year 25, your cash value would still be $400,000, the same as if you hadn’t borrowed to buy anything.

    What if you borrowed and repaid more than once? what would happen if you did it four, five or dozens of times? As long as you repay the loan at the interest rate the company charges, your cash value will remain the same as if you hadn’t borrowed.

    is it cool or what?

    But don’t assume you can do this with your life insurance policy. only a handful of life insurance companies offer this feature. that is one of the reasons to work with one of the bank’s 200 professionals.

  5. does not have a mandatory payment schedule. you can make payments whenever you want, in the amounts you want. just remember that the outstanding balance accrues interest.
  6. When the insured dies, any outstanding loan balance will be paid (deducted) from the death benefit, and the remaining death benefit will go to the policy beneficiaries.
  7. Want to know what your financial picture would look like if you added the bank to your financial plan and used it to finance major purchases?

    Request a free, no-obligation analysis that will show you how you could benefit from a personalized program that will help you achieve your financial goals and dreams without taking unnecessary risks. You’ll also discover how much you could increase your lifetime wealth simply by using a bank policy on yourself to pay for major purchases, rather than financing, leasing, or even paying for them outright with cash. You’ll be able to reduce financial stress by establishing a sizeable, safe and liquid emergency fund that gives you quick access to cash, when and for what you want, no questions asked! Click here to request your free analysis:

    do I have to pay my life insurance loan?

    See also : Premium Tax Credits & Form 1095-A | NY State of Health

    in general, yes. While you’re not tied to a rigid repayment schedule, repaying your loan reasonably has three important benefits for you:

    1. makes money available for other needs. (For example, paying off loans for college expenses can give you access to money in retirement.)
    2. If you die with an outstanding policy loan, the death benefit paid to your beneficiaries will be reduced by the amount of the outstanding loan.
    3. If the loan balance reaches the cash value amount, your policy could lapse, with serious tax consequences.
    4. then, in general, it is advisable to pay off your loans. however, most people, if they’re borrowing to help cover retirement expenses, don’t plan to pay back their loans after they’ve stopped working.

      Your financial representative can help you determine the smartest path for you, even before you purchase a policy.

      there is something you need to consider with a life insurance policy loan

      The outstanding balance on a take and forget policy loan will grow over time and could become significant as the interest on the unpaid loan is added to the outstanding balance.

      Fortunately, it’s easy to avoid this unfortunate possibility. A Bank on Yourself professional is trained to monitor your loans on an annual basis to ensure that your outstanding loan balance is well below your full cash value. if necessary, he or she can recommend that you at least pay the interest on your policy loan.

      some types of life insurance policies are much safer to borrow than others

      Remember we said you can borrow from any policy that builds cash value? that’s true. But with some types of policies, you could be playing with fire. When considering taking out a life insurance policy loan against your existing policy, please remember the following for your own financial security and peace of mind:

      concerns about loans for universal and indexed life policies

      insurance costs and administrative fees on universal life (ul) and indexed universal life (iul) policies are deducted from the policy cash values each month. These costs may include insurance charges, policy charges, transaction charges, policy issuance charges, premium charges, and rider costs.

      insurance contracts

      and ul and iul state that when those costs increase, the company can pass the increases on to you, the policyholder, up to a maximum limit. this can cause your cash value to decrease, putting your policy in jeopardy.

      Increased costs can also lead the company to increase your premium. If your premium goes up, you’ll have less cash to pay off your loan, which could cause your loan balance to go up.

      There is another problem that surprises unsuspecting iul policy owners. That’s when one of the “good” things promoted by universal life salesmen turns out to be a “really bad” thing.

      here’s the “good” stuff, and it’s often used as a sales pitch for iul policies:

      Most iul policies issued in recent years offer “non-direct recognition loans”. This simply means that if you have a loan against one of these policies, that loan does not change your cash value crediting rate. that’s a nice feature, and it’s one that “trust yourself” whole life policies generally offer.

      but it can turn bad, because iul sellers often imply that their policies will grow at an unrealistic rate, often 8% a year, or more. (Several life insurance companies that offer IUL policies have been sued by the government for this very problem.)

      If you have a policy where you’ll only be charged 6% interest on a loan and you’ve been led to believe you’ll earn 8% or more, you’ll have plenty of money to take every penny you could get out of the policy and reinvest it right?

      but no iul policy has ever returned 8% per year over the life of the policy. some years, there has been no growth!

      If you had borrowed 50% of your cash value and in six out of ten years there were no earnings on the policy (and this has happened before), you could reduce the value of your policy by 40% if the loan did not is suddenly repaid, has a policy with less cash value than expected and, at the same time, has a huge loan.

      Your policy is likely to lapse unless you have the resources to repay the loan to keep the balance from approaching cash value.

      In a case like this, could you just cancel your policy to save your bacon? unfortunately not.

      why not?

      See also : DocuSign (DOCU) Q1 2023 Earnings Call Transcript | The Motley Fool

      Because at the time you cancel your policy, you’ll owe income tax on every penny you received of the cash value of your policy in excess of the premiums you paid.

      here is a real life example:

      john had a life insurance policy with a cash value of $400,000. he has paid $100,000 in premiums so far and has borrowed a lot of money against his policy. In fact, John owes $360,000 on his policy loan.

      if john cancels his policy, or if the insurance company cancels it to pay off his loan, the amount john will have to claim as income on his taxes for this transaction alone is $300,000 ($400,000 cash value less the $100,000 you paid in premiums).

      Based on the tax basis, that would put John in the 32% tax bracket. That’s $96,000 in taxes on a policy you just canceled because your loan balance had wiped out your cash value and you couldn’t pay your loan balance.

      if john can’t pay off his loan balance even a little, where in the world will he get the money to pay the irs?

      concerns about universal variable and variable life insurance policy loans

      The concerns with variable life insurance policy loans are similar to those with universal policies. the death benefit or cash value may be reduced, rather than increased. premiums can be increased. There is no guarantee that this will not happen.

      With any policy whose basic components are not all guaranteed, borrowing (with or without a plan to repay the loan) is quite risky, because the future performance of the policy is unknown and unknowable.

      If your policy underperforms, you will personally have to deal with the results: higher premiums, lower death benefit, and reduced cash value, which, along with a large loan balance, could cause your policy expires, possibly leading to a staggering tax bill.

      This could be a very serious problem, because having used your cash value to pay off the loan, you won’t have any cash value left over to pay the tax bill that comes from this “phantom income.”

      Summarizing: The problem of universal and variable life insurance policy loans in one sentence

      These policies have many moving parts, but there is no guarantee that all the parts will move in a favorable direction for you, and that could be your downfall.

      why whole life insurance policy loans are safer

      With a whole life policy, all the costs that ul and iul policyholders have passed on to them are already accounted for and factored into their premiums.

      As the policyholder, you won’t have any unpleasant surprises, because everything is guaranteed. That means your annual cash value goes up, your death benefit and the premiums you pay are all locked in. And with a dividend-paying whole life insurance policy, everything is guaranteed except the dividends.

      dividends can only make your situation better, not worse!

      Consider including a self-banking dividend-paying whole life insurance policy in your financial plan

      You don’t buy a life insurance policy solely for its living benefits, of course. You buy it to protect your family and organizations you care about against financial loss if you die prematurely.

      But you shouldn’t ignore the living benefits of a “trust yourself” whole life insurance policy! One of those benefits in life is the ability to safely borrow against your policy to finance major purchases, while your policy grows as if you hadn’t touched it.

      There are also other benefits, such as tax advantages, security and guaranteed growth.

      To learn more about the bank-on-your-own strategy and the benefits it can bring you, download your copy of our free special report, 5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game, and Take the control of your future finances.

      And to find out if a high dividend cash value advance whole life insurance policy makes sense for your situation, request a free analysis and recommendation from a qualified and highly trained bank yourself professional. no obligation.

      Not only will you find out what you could gain from such a policy, but also how much you stand to lose if you don’t take advantage of this powerful wealth-building tool:

      continue to the sensible life insurance guide index

      Source: https://amajon.asia
      Category: Other

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