Why You Should Not Borrow from Your Whole Life Insurance Policy

Whole life insurance offers a unique feature. It not only provides regular life insurance, but also builds cash value over the years. Many people choose whole life insurance thinking that they can easily borrow money from such a policy if the need for cash arises. And while this is one of the strongest selling points of a whole life, or permanent life insurance, you need to evaluate whether borrowing cash against your policy is truly in your interests. Before purchasing a whole life policy you may later regret, check out the reasons why you should not borrow against your whole insurance policy.

The disadvantages of borrowing against the cash value of your whole life insurance policy

• The process of getting a loan may not be as quick as you thought. Before investing in whole life, ask the company how long it will take for them to process a loan? Your life insurance company may be able to complete an authorization for a loan by telephone or over the Internet. You need to know how quickly a loan request can be expedited and whether there are any stipulations.
• Although the money accrued over years is indeed, your money, this is not like withdrawing money from your bank. Any money that you borrow must be paid back in time with interest. Interest is charged at the rate specified or described in the policy.
  
  
  However, there are a few advantages to borrowing against a whole life policy. Cash borrowed from a whole life insurance policy can be used for just about anything-going on a vacation, paying off your credit card bills, etc. Your life insurance company cannot decline your loan request because of a bad credit report.
• Whole life insurance agents may forget to mention that you can borrow money from your whole life insurance only if there are sufficient funds in the cash value to secure the loan. Most whole life insurance policies do not accrue cash value until several years (3 to 5 years) after a policy has been issued. You may have to wait a stipulated time period, sometimes up to three years, before a loan is available.
• Avoid borrowing an amount that is more than the amount of premiums you've paid. The surplus amount you borrow is taxable.
• Whole life insurance agents will also tell you that you do not need to return the loan. But if you do not return the money you borrow, the amount you borrowed with interest will be deducted from the death benefits. Your beneficiaries will not receive the amount you intended.

Why Whole Life Doesn't Make a Whole Lot of Sense

Whole life insurance is a more expensive option than term life insurance because part of the premium you pay goes towards investments and administrative fees. The life insurance company has control over the kind of investments it makes with your money. There is little scope for optimizing the performance of your investments. There are administrative fees, commission and other charges that will be deducted from your cash value. In fact, in the initial years, these fees can run high and eat into your policy. Your policy may accrue significant interest only after five years.

The returns that are projected by whole life agents are at the most, an educated guess. Many quote on the higher side to attract more buyers. In reality, the rate of return on a whole life insurance policy is very low compared to other investments. The savings are tax-deferred but there are other investment vehicles that offer this benefit which are likely to give you more returns on your investment. Equities and mutual funds are historically known to give better returns, even if you invest just the surplus between a term life and whole life insurance policy. The money you receive when such investments mature is yours to keep. In contrast to whole life insurance, you don't have to return the money with interest.

If you die before the age of 100, when a whole life policy matures, your beneficiaries will receive only the face value of the policy. The interest that has accumulated is kept by the company. The only way you can utilize your cash value is if you borrow against your policy. But then again, you must return the borrowed amount with interest, or it will be deducted from the face value of your policy when a claim is made.

Conclusion

For all others, term life insurance usually works out to be the more affordable option. For instance, a whole life insurance policy for $125,000 will cost you $100.00. But the same amount of coverage may cost you just $7.00 for a 10-year period in term life insurance. Online life insurance quote providers also offer great discounts on term life insurance quotes.

However, a whole life policy has several benefits. You may want to consider whole life insurance policies if you have a large estate that is taxable. A whole life policy could be used to offset your estate taxes. You could also use a whole life policy to leave an inheritance for your children or grandchildren.

About AccuQuote:

AccuQuote is a leader in providing term life quotes to people across the United States. In 1986 it began operating with a single goal: to make the process of buying term life insurance as easy as possible for its customers. Their experienced professionals consistently deliver the most affordable term life insurance rates by comparing thousands of life insurance policies from dozens of top-rated carriers.