The Ins and Outs of Life Insurance Policy Loans

There are many types of permanent life insurance policies that offer a cash value component. The cash value in a permanent life insurance policy typically earns interest or returns, allowing it to grow over time – and it can do so on a tax-deferred basis.

Oftentimes, the interest rate on life insurance policy’s cash value is higher than that of a bank savings account or CD. Therefore, the funds within the policy’s cash value component will likely grow faster, thus providing a nice amount of money that could be available for borrowing should the policy holder need it.

One way for life insurance policy holders to access cash that is needed for supplementing retirement income, paying for a child or grandchild’s college education, or for any other need, is to borrow from the cash value of their policy.

In many instances, a permanent life insurance policy holder can borrow up to 90 percent or more of the total amount of cash value that is in the policy. But, while doing so can provide much needed funds, it could also prove to be detrimental to the policy if certain steps are not taken.

 

Death Benefit Implications

One important consideration here is the death benefit. For instance, if a policy holder borrows from their cash value and subsequently passes away prior to repaying the loan, the amount of the death benefit received by beneficiaries will likely be affected.

As an example, if a policy’s face value is $150,000 and $25,000 is borrowed from the cash value, then the policy holder’s beneficiaries will only receive $125,000 in death benefit proceeds if the borrowed amount has not been repaid.

In addition to possible death benefit implications, some insurance companies may also charge fees or other types of administrative costs to the borrower when taking out a loan on their policy. With that in mind, it is important that these potential costs be weighed against the loan’s interest rate, as well as any other types of penalties that could be imposed.

 

Tax-Related Considerations

If a life insurance policy holder borrows against the cash value in their permanent policy, it is not considered to be a distribution (whereas taking a withdrawal from the cash value would be).

Taking a policy loan is also not considered to be income to the recipient, and therefore will not be taxable as such. But, there can still be some tax-related consequences as a result of life insurance policy loans that are not repaid.

For example, if the unpaid loan causes the policy to lapse – or if the policy holder cancels the policy before the loan is repaid – the un-repaid amount of that loan could be considered as taxable income to the recipient. Likewise, if an unpaid loan is considered as “forgiven” by the IRS, these funds will no longer be considered a loan, and in turn, will be considered as taxable ordinary income.

 

Showing Clients the Many Benefits of Life Insurance Policy Loans

Provided that the above factors are considered, borrowing funds from the cash value of a permanent life insurance policy can offer clients a viable method of accessing money that is needed for a variety of uses.

Want to generate a steady and reliable source of life insurance leads that you can educate about the benefits of this flexible financial vehicle? We can help. Just give us a call at 1-800-643-6143 for more details on how you can get in front of more – and more qualified – life insurance prospects, and generate thousands of additional commission dollars each and every month.

 

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Brian J. Kay, Executive Director, Leads4Insurance
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