A Few Things You Need to Know
Willie Ware
July 20, 2020
Los Angeles, Ca.
Licensed Life Insurance Agent
Sherman Oaks, Ca.
Ca. License # 0G97478
A little About Life Cash Value Insurance:
Life Insurance is typically used as protection in event of the unexpected passing of the insured or one of the insureds. An event like this would usually cause financial hardship to a household. A couple of examples would be the loss of a parent in a two-parent household. The insurance would then replace the income or a portion of the income of one of those parents, to allow the family to remain stable during that difficult time. Another would be to pay for the final expenses of the individual insured, including debts that the family would be liable for, such as a mortgage, credit card loans, personal loans, etc. these are just a few scenarios, out of many that someone might take out a policy, I just wanted to give a couple of examples to point out a few of the different reasons.
This is an Important Decision that Should be Made with the Input of Those Involved.
It is a financial instrument and it should be given some proper consideration in its purchase. You could invest a lot of money into one of these policies, so choose wisely, because it’s your hard-earned money that you would be paying for one this and possibly for quite some time.
Cash Value Policies:
So, the type of policy we’re going to be referring to today are the types that have
Cash Value that you can borrow against, such as Whole Life or various Universal Life
Insurance Policies. These policies will begin to gain cash value or excess cash value
beyond the cost of the insurance after a certain amount of time. Also, there could be cash value in the policy if a large enough sum is placed there in the initial phase. Now when this cash value
builds up the insured can then borrow or take out a loan against the amount that has accumulated over the cost of the insurance, which is where the term “Cash Value” applies.
In order to take out this loan It would simply take a phone call and a written request from the owner of the policy, some insurance companies now will even allow policy loan request online via computer. The insurance company would issue a check to the owner of the policy, usually the insured in the amount of the loan. This amount has to be less than the cash value that’s in the policy.
But is that a good idea? :
Well there are pros and cons to this choice, and we will take a look at some of them today.
Hopefully, we can shed some light on the process to help you to make a wise choice on
how you use that money. Please don’t take this as a guide to what you should or shouldn’t do
with this money, it’s your money, just a little insight to clue you in as to some of your options.
So let’s get started.
Pros:
This loan is taken out against the cash value of the policy, essentially, it’s your money.
Because of this you don’t have to go through a heavy application process to qualify
for this loan. You don’t have to provide a bunch of documents, verify your income or
provide a Stellar credit report. The money from the loan can get to you fairly quickly
in comparison to other types of loans.
There are no upfront fees, you aren’t paying a price to get this cash, it’s
your own cash.
There is no collateral needed for this loan, you would be taking this money out of
the cash value of the policy so you wouldn’t have to be concerned about securing it.
There are no credit checks, which could go against your credit rating.
There is no set timetable of paying back this loan. You can pay it back right away or
you can pay it back on your own terms. There are no payment due dates for these loans,
however, they will continue to build up interest as time goes by. The funds accessed against the loan are not tax deductible, they however can be taxed if the interest in the policy becomes more than has been contributed and you borrow against that, so be careful of that exception. The cash value in some types of policies can act as a buffer and can help to prevent the policy from lapsing.
Cons:
You are being charged interest on your money, and this interest will add up. So it
will cost you more than you borrowed, even if it comes off of the face amount, you still
will be obligated to pay it back.
Now God forbid If you should die before you pay the loan the total amount owed, not just
the amount your borrowed but also the interest on the loan will come off the face value of
the loan. So now the interest that has built up over the time that the loan also has not repaid.
you are essentially borrowing your own money and paying it back plus interest, similarly to
paying interest on purchases with a secured credit card. If you run up the total of that card, you
will not get the deposit back when the account is closed, plus you might even owe more interest.
This could also institute a tax debt that you owe if you should happen to cash out your policy and you
borrow more than you put in. Example, if you put money into an account and if the interest in the account grows, then you borrow against that money. If you close out the account then there could be
a tax penalty on the money that you borrowed because it was more than the amount that you paid into the account and you borrowed against the increased cash value, which is taxable.
If you borrow against the policy and you for whatever reason or another, don’t make timely payments on the account this could cause the account to lapse. This is reflected quite often in the Universal Life policies because the payments are flexible depending on the amount of the cash value that is in the policy.
Over Loan Policy Riders:
Now there are riders that some insurance companies offer that is called Over Loan Protection Riders to prevent the loans from causing the policy to lapse. These riders will prevent that from happening. The scenario is the that the loan amount outpaces the amount of cash value in the policy, which in turn causes the policy to lapse. This doesn’t seem like a likely scenario to the average person, however when you consider the low interest rate of returns today this could certainly happen if there is a large loan taken out on a policy and the borrower isn’t able to make both the loan payment and the payment to keep the policy in force, thus the rider.
Conclusion:
The Insurance company and the agent will both let you know that there is a cash value component to Life Insurance, that’s their job, it’s a feature of Life Insurance policies that can accumulate cash value. This is just my opinion, but this should only be used in emergency situations because it is an interest-bearing event. You will always pay more money than you borrow. If this weren’t good for the insurance company, they wouldn’t do it. They don’t make a lot off these loans because they can make enough if there are enough people that are willing to take out these loans. It’s convenient, it’s ready cash and the temptation is there to take it. There are other options that might make more sense if you can get a loan at a reasonable rate, because if you take this you might be robbing Peter without having to pay him back until years and interest amounts later and then you still have to pay Paul. Collect your thoughts, get feedback from other people that are involved, if that’s possible and make a good decision.
Life Insurance is there to protect you in the event of something going wrong. I personally would avoid taking out one of these loans if there were any other options. If there isn’t, then the money is there for you. I will end with what I do and think often. I hope that this article has helped you in some way. I am always available for a consultation, at no charge to you of course. Just get in contact with me and I will get back to you at the earliest possible time and I will do everything in my power within reason to help. If you ask me a question and I don’t know the answer, then I have an associate or a member of my upline that will find out what it is that you need to know. So please feel free to contact me at the following email, bill@awareinsurance.com. I’m a licensed agent in Ca. and Tx. I specialize in Life Insurance and Medicare and I was first licensed in 2010. So with that I will let you go and good luck with your endeavors.
Willie Ware Jr.
