Tuesday, September 15, 2009

Can You Get Credit From Life Insurance Policies?

Exercise caution when borrowing from permanent life insurance cash value

As the ability to obtain credit in the United States becomes more difficult, people are examining other avenues of financing to include many non-traditional lending sources.

One of the most common methods being used for personal microloans and smaller purchases is a withdrawal of life insurance cash values. Although not specifically intended as a source of credit or lending, the cash value account in a permanent life insurance policy may be used for purposes other than funding the life insurance contract itself.

Function


The main function of a life insurance policy is to provide a monetary benefit to a person's surviving family members so they can maintain their current lifestyle in the event of an unforeseen tragedy involving the primary breadwinner.

Any accumulation of cash value or equity inside a permanent life insurance policy is merely a secondary feature of the product and not intended to be a focal point, nor touted as an additional benefit.

Types


All life insurance can be divided into two types of policies---term and permanent. Term life insurance policies are simple and plain, protecting the insured person's life for a specified duration in exchange for a specified payment.

Permanent life insurance is more complicated and involves the ability to manipulate the premium payment schedule, frequency and amount. Additionally, permanent life insurance policies contain a policy feature that involves the creation of a separate account called cash value, into which a portion of premium payments are deposited.

Size


The amount of money that will accumulate in the cash value portion of a permanent life insurance policy will vary depending on the death benefit of the product, the size and frequency of the premium payments and the type of permanent insurance product. More frequent, larger deposits will result in a much faster accumulation of cash value.

Effects


The withdrawal of cash value from a permanent life insurance contract will have severe adverse affects on the lifespan of the policy if those funds are not replaced. Since the cash value account is actually a type of escrow for future premium payments, any significant removal of this money will jeopardize the policy's ability to function as intended. The result would be the termination of the policy or the obligation of the owner to increase the normal premium payments to account for the missing cash value.

Benefits


The only benefit to using the cash value of a permanent life insurance policy as a source of credit is the tax-advantaged status of the actual withdrawal. Since life insurance cash value withdrawals are technically structured as loans from, and repayments to, the life insurance carrier, there are no income taxes due on the proceeds received from the policy. However, in the event that the policy is terminated or canceled before the repayment of the cash value loan, there may be tax consequences.

References


Insure.com: Cash Value in Life Insurance: What's it Worth to You?
Northwest Mutal: Protect Your Financial Well-Being

Resources


New Your Life: Tax Advantages of Cash Value Life Insurance




This article is a Twisted Nonsense Exclusive! (09/15/2009)