When An Annuity Might Be The Better Option
On the other hand, you should likely opt for an annuity instead of life insurance if:
- You want a guaranteed source of income. Life insurance policies arent designed to provide guaranteed income. While you may be able to borrow against the value of a whole life policy or make withdrawals from it, theres no guarantee of a steady stream of income until you die. Annuities can provide this, depending on what type of annuity you choose.
- You dont want to pay insurance premiums forever. With an annuity, you may make a single lump-sum payment or make periodic payments for a set period of time during your accumulation phase. But once you enter into your payout phase, you no longer make payments but instead receive a regular monthly income.
Remember, though, with an annuity you may receive a lump-sum payment at a set time or may receive a regular stream of payments for a guaranteed period of time. These regular payments often come on a monthly basis, providing regular income during retirement. But your annuity may not provide a large death benefit, or any death benefit at all, depending on how the insurance contract is structured.
No Lost Opportunity Cost With A Bank On Yourself Life Insurance Policy Loan
Bank On Yourself-type life insurance policies usually have non-direct recognition loan features, are issued by participating life insurance companies, and are whole life, never indexed universal life policies.
When you borrow against your policy, you continue to get the same guaranteed annual cash value increase and the same dividend, just as if you hadnt taken the loan.
On the other hand, when you withdraw from your savings to pay cash, earnings on the money you withdraw stop instantly, and only resumeslowlyas you replenish your savings over time. Youve lost the opportunity to earn interest until the money is placed back in your account. The amount of interest you lose is called your opportunity cost.
But not so with a Bank On Yourself-type policy loan. Your cash value continues to grow.
Because of that, theres no opportunity cost with a policy loan. Your assets continue to grow at the same rate as if you hadnt taken a loan.
Heres what I mean: Lets say you have a life insurance policy loan from one of the few companies that offer non-direct recognition policy loans. And lets assume you pay back your loan at the same interest rate the insurance company charges.
When your loan is paid off, whether in two months or 20 years, youll end up with exactly the same cash value as if you hadnt taken out a loan.
Doesnt it make sense to finance major purchases in such a way that you receive the most favorable termswith a life insurance policy loan?
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Compared to personal loans, which have high interest rates of 15-18 per cent, and credit card debt, which has interest rates in the range of 36-52 per cent, loans against insurance policies have lower interest rates, of 9-12 per cent. The best part is that because it is an advance paid against the policy’s maturity proceeds, the insurance companies do not consider creditworthiness or the CIBIL score when granting you this loan. When applying for a loan, income documentation and bank statements, in addition to the original policy documents, are required to be submitted, says Swaminathan.
Therefore, such loans work well for people who do not have enough documents to avail loans from banks or other lenders, or their credit scores are low and they cannot get loans at reasonable interest rates. The facility to adjust the sum borrowed in the maturity proceeds could also be attractive for some, especially if their financial condition is stressed, says Suresh Sadagopan, founder and principal of Ladder7 Financial Advisories, a financial planning firm.
Hazards Of Loan Against Insurance Policy
It is important to remember that if the policyholder passes away unexpectedly before the debt is repaid, his or her family will not be the only beneficiaries of the insurance policy. A loan taken on the insurance may prevent the nominees from receiving the full benefit of the policy.
Keep In Mind
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How To Borrow From Your Life Insurance Policy
Taking a loan out on life insurance is fairly straightforward. The first step is to determine whether the life insurance policy is one of several types of permanent policies that are eligible for borrowing, including:
- Whole life
- Universal or adjustable life
- Variable life
- Variable universal life
Unlike a bank loan, there is no approval process to earn a loan against a life insurance policy. It may also be possible to take the loan as a cash surrender value line of credit to be drawn from as needed.
Interest on the loan will begin to accrue immediately, at a rate determined by the insurer which may be lower than the rate a bank would charge. In the best-case scenario, the loan repayment will begin immediately, usually monthly.
Policy Loans Vs Policy Withdrawals
As previously stated, life insurance policy loans can be risky if you are not careful and purposeful with paying back the loan. Your life insurance policy loan is not a real loan in the classic sense. This is because the life insurance policy owner has not agreed to repay the cash that has been transferred from the insurer even though interest is charged. It really is an advance of money that the carrier will have to pay out from the terms of the life insurance policy.
If you were to die before this loan has been paid back, the death benefit will be reduced based on your unpaid balance.
With a life insurance policy withdrawal, youre more or less reducing your policys death benefit and cash value. It is viewed as a partial surrender of the cash value net. Its very important to know that if you withdraw funds that goes beyond the amount of premiums paid could be taxed.
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Consider The Impact Of Taking Cash Out Of Your Life Insurance Policy
Taking money out of a life insurance policy leaves you in a bad spot as far as life insurance is concerned. People that take out a loan and dont repay their life insurance policy could leave themselves with a smaller death benefit. This puts their family at risk, assuming they still need the full death benefit to cover necessary expenses after death.
Similarly, surrendering the policy, straight out withdrawing cash value, or paying the policys premiums with cash value can reduce or eliminate your death benefit. If youre able to secure term life insurance at an affordable rate, this may not be a big problem.
People may think that they can get new life insurance for a similar price. Unfortunately, prices generally go up as you get older. If youve developed any significant health issues, this can increase costs too. In fact, some people may now be uninsurable as far as life insurance is concerned.
Before you take money out of a life insurance policy in any way, consider the impacts. Investigate whether you can get new life insurance to cover your needs.
After youve considered the impacts, consider your other options for getting access to cash. You may be able to take out a personal loan, borrow money from family, or get a credit card with a 0% introductory APR on purchases. While none of these situations are ideal, you have to decide if theyre a better fit than potentially jeopardizing your life insurance policy.
Math Matters For Acb But Less Than You Think
An insurance policys ACB is a cumulative amount determined by the following formula:
To make things even more interesting, element O = U.
Generally, these elements represent various transactions that impact the tax value of the policy .
Obviously, it would be a daunting task for any policyholder to keep track of the policys ACB. Fortunately, the insurance company assumes the responsibility. A policyholder typically receives an annual or quarterly policy statement, which includes up-to-date ACB calculations.
Still, its important for insurance advisors to have a basic understanding of the ACB calculation, to both address client questions that might arise and to assist clients in determining the impact of certain policy transactions.
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Surrender The Policy Completely
Sometimes, people realize they made a mistake buying permanent life insurance. If youre still young enough and healthy enough to get a term life insurance policy, you may decide you want to get rid of the whole life insurance policy.
This process is called surrendering the life insurance policy. When you surrender a life insurance policy, the policys cash value is paid out to you. Unfortunately, its not that straightforward.
Life insurance companies build in a fee, called a surrender charge, to punish people for canceling their life insurance policies early in the policys life. This happens because the companies need time to recover the costs of establishing your policy.
The surrender fee reduces the cash you receive from the cash value of your policy. The surrender fee may decline over time and should eventually disappear altogether. Even so, canceling with a surrender fee may make sense if you can get a cheaper term life insurance policy that meets your needs and you need the cash.
Gap: Extra Insurance That’s Worth The Money
One type of extra insurance you might want to consider is gap insurance, which covers the difference between the actual cash value of your vehicle and the current outstanding balance on your loan if your car is totaled.
So if you owe $25,000 on your car and it’s only worth $20,000, gap insurance will make up the difference.
You may be offered the insurance by the dealership where you buy your car, by the bank or credit union where you finance your car, or through some auto insurance companies. Be sure to shop around for the best price, as it can vary widely. Insurers typically offer the lowest price.
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Taxation Of Life Insurance Policy Loan Repayment
Since receiving the proceeds of a personal loan are not taxable, it is perhaps not surprising that the repayment of that loan isnt taxable either. Repaying the principal of a mortgage doesnt have tax consequences, repaying the balance on a credit card doesnt have tax consequences, and repaying a personal loan for which a life insurance policy is collateral doesnt trigger any tax consequences either.
However, the no tax consequences outcome of repaying a life insurance policy loan can be impacted by how the loan is repaid. To the extent that it is repaid with outside dollars , the repayment is not taxable just as the receipt of the loan proceeds werent taxable either. On the other hand, if the repayment of the loan involves drawing money from the life insurance policy itself, the outcome may be different.
What To Know Before Making Loan
For the policy loan service, do not forget to make repayment as soon as possible because if an unexpected event happens, your sum insured and coverage might be impacted. In addition, if the outstanding loan amount and interest are higher than the policy surrender value, your policy will end before the maturity date and policy benefits might be reduced according to the outstanding loan amount.
Remark
- Loan amount must not exceed policy cash value.
- Loan interest rate is subject to each type of life insurance policy. However, conditions are as specified by the Company.
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Withdraw Money From The Cash Value
Your policy may allow you to permanently take the money out of your permanent life insurance policys cash value. This has profound impacts, though, and should be very carefully thought through before you do it.
Withdrawing money from the cash value youve built up may seem like a smart move. You did pay money and purchase a permanent life insurance policy partially to build cash value. Sadly, it has other impacts that may defeat the purpose of this part of your policy.
In particular, permanently withdrawing the money from your cash value could lower your policys death benefit. In fact, some life insurance policies reduce your death benefit by more than the amount of cash value you receive. This could leave your loved ones without the money you intended to leave them when you took out the life insurance policy.
You should always check your particular life insurance policy for details to see how this would work in your situation. The impacts may be minor enough where its the best option for you. In other cases, you may find yourself considering another way to access your policys cash value.
Can You Borrow Against Term Life Insurance
- Find out if you can borrow against term life insurance. Learn what policy loans are and how they can provide funds to cover emergency and everyday expenses.
Buying a term life insurance policy lets you provide money for your loved ones after you die. When unexpected expenses like medical bills arise or you need to supplement your income due to a job loss or retirement, you may wonder if you can borrow against term life insurance or access the death benefit early. Understanding policy loans and life insurance surrender can help you weigh your options during times of financial hardship or help you choose the right type of life insurance when shopping for a new policy.
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Disability Insurance On Credit Or Loans
This type of insurance can help to ensure that the regular payments on your loan or credit card will be made for a certain period of time if you become ill or have an accident that leaves you unable to work and earn an income. It generally doesn’t pay off the full outstanding balance of your loan.
You’ll still be responsible for paying the balance on your loan when you recover or after the coverage period ends, whichever happens first.
Your certificate of insurance will define the disabilities that would make you eligible for benefits.
It will also have other terms and conditions related to:
- the amount of the payments
- how long the company will make payments
Some policies will include job loss insurance in addition to disability insurance. Job loss insurance may make the minimum payment if you cant work because of involuntary job loss. Involuntary job loss usually means if you were laid off, dismissed without cause, or if youre involved in a legal strike or walk out.
You Dont Want To Risk Your Other Sources Of Equity
Some if you put up some kind of asset, like your house, as collateral. However, if you fail to make loan payments on time, the asset could be repossessed. By taking out a life insurance policy loan, the risk you incur is that you could lose your life insurance coverage. While that could leave your loved ones with a financial burden after you die, it may be better than losing your home in the short term.
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Policy Loan Application By Sending Documents To The Company
Details of Policy loan application by sending documents to the Company.
Who is suitable for applying for policy loan by submitting documents to the Company
- Those who are not comfortable doing online transactions.
- Those who wish to submit documents to the Company in person or send documents by post.
- Those who wish to borrow more than 2,000,000 baht or less than 1000 baht per policy.
- The insured is under 20 years of age.
The process of policy loan application by sending documents to the head office.
Prepare all documents as follows:
In case of submitting the loan application by yourself. 1. Amendment requisition form to exercise policy loans take out. 2. Policy loan contract form. . Preview 3. A copy of the front page of the savings account passbook with the insureds name. 4. Copy of the insureds passport photo 5. A copy of Identification Card, certified true copy by the insured. In case of minors: add a certified true copy of the minors ID card together with the fathers and mothers or legal representative.
In case of transfer of benefits under the policy. 1. Amendment requisition form to exercise policy loans take out. 2. A policy loan agreement signed by the transferee. . Preview. 3. A copy of the front page of the savings account passbook with the name of the transferee. 4. A copy of a passport photo of the transferee. 5. A certified true copy of the identification card of the transferee.
Terms and conditions for policy loan by sending documents to the head office.
The Taxation Of Receiving A Life Insurance Policy Loan
One of the more popular features of permanent life insurance with a growing cash value is the fact that the policyowner can borrow against the policy without incurring any tax consequences. By contrast, as noted above, surrendering the policy could cause a taxable gain .
In reality, though, the tax-favored treatment of a life insurance policy loan is not actually unique or specific to life insurance. After all, technically a life insurance policy loan is really nothing more than a personal loan from the life insurance company, for which the cash value of the insurance policy is collateral for the loan. The fact that the life insurance company has possession and controls that policy cash value allows the company to be confident that it will be paid back, and as a result commonly offers life insurance policy loans at a rather favorable rate .
Accordingly, the cash from a life insurance policy loan is not taxable when received, because no loan is taxable when you simply borrow some money! Just as its not taxable to receive a credit card cash advance, or a business loan, or the cash from a cash-out refinance, a life insurance policy loan is not taxable because its simply the receipt of a personal loan.
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