Sunday 20 March 2011

Should I Borrow Money from My Life Insurance?

We’re living in tough times right now. With unemployment hovering dangerously close to double digits and credit harder and harder to come by, many are wondering just what they’re going to do for extra cash, especially with the holiday season upon us. Some may be considering borrowing money from sources such as their cash value life insurance policies. Of course, those with term life insurance don’t have that option, but in most cases, it’s just as well.
Generally speaking, it just isn’t a good idea to borrow money against your life insurance policy’s cash value, even if you are able to do so. Here’s why:
  • You have to pay the money back. Even though it’s your cash value you’re borrowing against, you  like any other loan: with interest. And, like any other loan, the interest rate you will pay for your loan is going to be higher than the interest rate the insurance company pays you on the cash value.
  • Any money you haven’t paid back comes out of the death benefit. If you were to die before you paid back the loan, the insurance company will take the balance of the loan out of the death benefit paid to your beneficiary. Most people really don’t have enough life insurance as it is, and if something happens to you, your family will need that money to handle final expenses.
  • The loan doesn’t help your credit rating in most cases. While you may find that you don’t have many other options if your credit is poor, you should at least look into all of your other options first. If you have to pay high interest rates anyway, you may as well have it reported so it can benefit your credit rating.
While insurance companies can’t cancel your insurance for failing to pay back a loan (unless the amount owed exceeds the face value of the policy), you can put yourself into a really bad position by borrowing against your life insurance policy. If you’re that hard up for money, you’d be better off simply cashing out your whole life insurance policy and buying term life insurance instead. It may not build cash value, but the premiums are a lot cheaper, and we’re sure you have better purposes for the rest of the money.

12 comments:

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Raizu said...

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jenleyna said...

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