The risks of borrowing from your life insurance policy by Scott Witt, president of Witt Actuarial Services LLC
As the recession drags on, consumers may be considering a loan from their life insurance policies as a source of ready cash. But think long and hard before making such a move and learn about the true implications of this kind of loan-related decision. Life insurance policy loans are almost universally misunderstood and mismanaged. Complicating policy loan decisions further is that life insurance agents are generally not trained in providing optimal advice about borrowing against policies.
Few understand the true cost of borrowing against life insurance policies and that this type of loan is often more expensive than other forms of borrowing. Consumers fall into the trap of thinking that borrowing does not have any associated costs because they are “paying interest to themselves.” Many think they are somehow getting essentially a “free” loan and perhaps even enhancing their policy at the same time! Few realize that they are not borrowing from themselves, but instead they’re borrowing from the insurer with the policy’s cash value serving as collateral. Additionally, the interest on the loan is not tax deductible.
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