INSURANCE

Q: I need some quick cash and am thinking of borrowing money from my life insurance policy. What is the downside to doing this?

A: Borrowing money from your life insurance can be a quick and easy way to get cash when you need it. Unlike other types of loans, you do not have to fill out a credit application, explain why you need a loan or discuss how you plan to use the money. There will not be a credit check so your loan will not appear on your credit report. You will be charged interest on the loan, but the interest rate is usually lower than what is being charged for other commercial loans or by credit card companies. Also, in most cases, there are no tax implications since the IRS does not consider a loan to be income. Your insurance company will not have a set schedule for paying back the loan so it is entirely up to you how and when you pay back your loan.

While all this sounds great, there are a number of drawbacks you need to keep in mind. Most important is that you can be jeopardizing your family’s financial future if you do not pay back your loan in a timely manner. Any outstanding balance and accrued interest you owe will be deducted from the policy’s death benefits if you do not pay back the loan within your lifetime. In addition, insurance companies often deduct the interest from the policy’s cash value. Your policy can lapse once the accumulated interest and the loan amount exceed your cash value. To avoid this, do not let the loan ride for too long without repayment. The only types of policies you can borrow against are permanent or whole life insurance policies where you have accumulated enough cash value to cover a loan. Building this cash value can take years to accumulate. I suggest you contact your insurance agent to find out how much accumulated value you have and what you can borrow. You may also want to discuss any tax implications with your financial advisor. If you have questions concerning Life, Health, Medicare Supplement Insurance, Medicare Advantage plans or other insurance questions, please contact me at 440-255-5700 or Lmutsko@ mutskoinsurance.com. I will help you get the best coverage to meet your needs.