Universal life insurance is a type of permanent life insurance that offers both a death benefit and a cash value component. This cash value component, which grows over time, can be accessed by the policyholder through loans, withdrawals, or surrender. In this article, we will explore the benefits and drawbacks of borrowing from universal life insurance policies.
How Universal Life Insurance Loans Work
When you borrow from a universal life insurance policy, you are essentially borrowing from the cash value of the policy. The loan is secured by the policy's cash value, so there is no need for a credit check or collateral. The interest rate on the loan is typically lower than what you would get from a traditional lender, and you can pay back the loan on a schedule that works for you.
It's important to note that any loan you take out will reduce the death benefit of the policy. If you die before the loan is repaid, the outstanding balance will be deducted from the death benefit. Additionally, if you don't pay back the loan, it will accrue interest and fees, which will further reduce the cash value and death benefit of the policy.
Benefits of Borrowing from Universal Life Insurance
There are several benefits to borrowing from a universal life insurance policy:
No Credit Check or Collateral Required
Since the loan is secured by the policy's cash value, there is no need for a credit check or collateral. This can make it easier to get a loan, especially if you have a poor credit history or don't have any assets to use as collateral.
Lower Interest Rates
The interest rate on a universal life insurance loan is typically lower than what you would get from a traditional lender. This can save you money in interest charges over the life of the loan.
Flexible Repayment Schedule
You can choose the repayment schedule that works best for you. Some policies allow you to make interest-only payments, while others require a minimum payment each month. You can also choose to pay back the loan in a lump sum if you have the funds available.
Tax-Free Access to Cash
The cash value of a universal life insurance policy grows tax-deferred, meaning you don't have to pay taxes on the growth. When you borrow from the policy, the money is also tax-free. This can be a valuable source of tax-free income in retirement.
Drawbacks of Borrowing from Universal Life Insurance
There are also some drawbacks to borrowing from a universal life insurance policy:
Reduced Death Benefit
Any loan you take out will reduce the death benefit of the policy. If you die before the loan is repaid, the outstanding balance will be deducted from the death benefit. This could leave your beneficiaries with less money than you intended.
Accrued Interest and Fees
If you don't pay back the loan, it will accrue interest and fees, which will further reduce the cash value and death benefit of the policy. This could leave you with less money in retirement, or your beneficiaries with less money after you die.
Potential Surrender Charges
If you surrender the policy before the loan is repaid, you may be subject to surrender charges. These charges can be significant, especially if you surrender the policy early in its life.
Conclusion
Borrowing from a universal life insurance policy can be a good way to access cash when you need it. The interest rates are typically lower than what you would get from a traditional lender, and you can choose the repayment schedule that works best for you. However, it's important to understand the drawbacks as well, including the reduced death benefit, accrued interest and fees, and potential surrender charges. Before taking out a loan, be sure to carefully consider your options and talk to a financial advisor or insurance professional.
