One of the greatest benefits a whole life policy is its cash value, which you can tap into by taking a loan from it. Why take a loan from your own money? It’s tax advantageous! You could withdraw the money. Either all of it or just a part of it. However, you’d have to pay income tax from. While a death benefit is not subject to income tax, a surrender is, or at least the accrued interest is. In addition, a surrender means you lose your coverage, or at least part of it.
Advantage of Loan
A whole life policy is a long term investment. It’s not a savings account. Regardless of what some agents, brokers or financial planners may try to tell you to get a sale. The first few years your policy offers you virtually no cash value. With passing years, especially if you selected the Paid Up Additions Rider (PUAR), your policy grows in value and builds a cash pile. Since this growth is dividend driven, the withdrawing the money is considered income. Loan is something which you get charged interest for, and should be repaid, therefore it is not income. But that’s not all!
Most insurance companies also do not consider your loan to be a typical withdrawal. Therefore they will grow your policy as if the money was still in it. This means that taking a loan does not impact your cash growth as per your illustration. No matter how much money you borrow, as long as there is enough cash in it to cover premiums and fees, your guaranteed values remain unchanged. And your paid up additions are also calculated as is all the money was in your policy. This aspect significantly lowers the actual loan cost (interest charged) to just a few percentage points.
Process For Taking a Loan
Getting access to your money is not instant like in a bank. You must first fill out an Application for Policy Loan. This application is then processed by your insurer and money is made available to you in a few days. The repayment of the loan is entirely up to you. The only thing your loan decreases is your total death benefit. The guaranteed face value remains unchanged, but the additional coverage is subject to loan balance.
Have a Specific Question?
Since we provide free life insurance consulting, don’t hesitate to drop us a line. Ask a question and we’ll do our best to answer it. We are always ready to assist you. And if you want to know your options in the life insurance area, well, just fill out this form and let’s get a conversation started.