I need money. What happens if I take out or borrow life insurance?
Q. Money is tight. I live on a fixed income and with inflation and rising prices I need more money. My only real option, I think – so I’m not taking money out of the stock market now that it’s down – is to either take out a loan or withdraw from the cash balance of my life insurance policy. What should I be worried about before making a move?
— Pinch pennies
A. That’s an excellent question.
People often misunderstand what it means to take a loan or withdrawal of a life insurance policy.
There are many types of life insurance, but we’ll assume you have a traditional whole life insurance policy.
Let’s start with policy loans.
Ed Gaelick, licensed life underwriter and licensed financial consultant at PSI Consultants in Glen Rock, said you wouldn’t actually take a loan from your policy. Instead, you would technically be borrowing money from the insurance company.
“They would loan you their money and charge you interest on the loaned and/or unpaid amount,” he said. “The interest percentage on the loan is probably contractual, so check your policy for that amount.”
If you pay off the loan or reduce it, any “unused” loan interest paid up front would be refunded or reduce the loan interest balance, he said.
“You can keep a policy loan unpaid forever, but the death benefit would be reduced by any loan,” he said.
Gaelick said interest on the loan should be paid until the loan is paid off.
Also, if you cashed in or surrendered the policy, the amount you would get would be net of any outstanding policy loans, he said.
“If a policyholder borrows against the cash value of their life insurance policy, the amount borrowed is not subject to tax,” he said. “This reasoning is consistent with tax policy on other types of loans, such as consumer loans or home loans. These ready are simple transfers of capital or savings from one person to another through a financial intermediary.
Withdraw money of a life insurance policy is different.
“If the planets are aligned, you might be able to make the cash value add-ons paid if your benefit amount has increased over the years due to dividends,” Gaelick said. “It will reduce the death benefit but get you the money you need without taking out a loan. This is a great tool provided you agree to permanently reduce the death benefit amount.
Before you do anything, talk to a professional who can review your policy and review your specific options.
Send your questions to [email protected].
Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.