YOU ASK:

Is it better to cash out your life insurance policy or a loan against it?

WE ANSWER:

In case you need money for an emergency, you can use your life insurance policy as a source of cash. You can surrender your policy in exchange for its cash value or just cash in some of the equity. Or, you can take out a policy loan, in the expectation that you will pay out the loan sometime in the future. In the event that you die, the loan will be deducted from the proceeds of the insurance.

You should first check what kind of life insurance you have. Term life insurance has no cash value and thus, you cannot cash your policy out or take a loan against it. Now, if you have a whole life insurance policy, you can check the cash levels you have already attained.

In our opinion, it is better to get a policy loan rather than to cash out your life insurance policy.

Here are some reasons why you should think of getting a policy loan:

  • You still have the opportunity to pay off the loan and keep your insurance when your financial situation improves.
  • If you cash out on your life insurance policy and if you may want to buy another policy later in the future, the premiums may be more expensive. Or worse, you may end up being denied coverage because you have developed a health problem by that time.
  • Since you are borrowing against a solid asset (your life insurance policy), the interests that the loan will have will be lower than other kinds of loans.
  • You will also have the advantage of a more flexible payment schedule.

However, there are some drawbacks to a policy loan that you have to consider:

  • There are limits to the amount you can borrow, which is the amount of cash value the policy presently has.
  • As with other loans, the interest will be charged as long as the loan remains unpaid.
  • When your policy lapses or when the policy is surrendered, the loan amount (plus the interest) will be credited as taxable income.
  • You may have to pay premiums out-of-pocket if you loan against your dividends.

Before you do get a policy loan, please consult with your agent so that you know exactly the financial impact of the policy loan.

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