When it comes to borrowing money, many people in Burlington, North Carolina turn to their financial institution for a loan. Few realize that they can take out a loan against their life insurance policy, provided they have the right type of policy.
To borrow from your life insurance in the first place, you must have a policy that accumulates cash value, such as whole life or universal life coverage. For every year you keep the policy active, it builds tax-deferred cash value. How quickly a policy builds cash value depends on a variety of factors, including the amount of your monthly or annual premiums.
You can borrow against your policy’s cash value of to a certain amount determined by your insurance provider. However, there are plenty of other risks involved:
- As with any other loan, the outstanding amount will accumulate interest.
- If you don’t pay back the loan, the outstanding amount plus interest will be deducted from your death benefit – the amount your beneficiaries will receive when you pass away.
- Your policy’s tax-deferred status only lasts as long as you live. If you have an outstanding balance when you pass away, that amount is subject to taxation.
- If your policy lapses, you may end up with a tax liability that could potentially exceed the policy’s cash value.
Anything can happen on the winding road of life. At Don Allred Insurance, we help people throughout Burlington and the surrounding areas plan for the unexpected by providing effective and affordable personal home, auto and life insurance coverage through our multiple insurance partners. Contact us today to speak to an independent agent if you’re in the market for a new policy or have questions about your existing coverage.