Life insurance is a uniquely flexible financial product that provides valuable protection for your loved ones. Certainly, the main purpose of life insurance is the death benefit, which may supply your family with much-needed cash upon your death. This can go a long way toward helping them meet the expenses that may arise, including living expenses, final costs or taxes. In addition, permanent life insurance also has many "living benefits" — benefits that you can take advantage of during your lifetime. One major "living benefit" is the accumulation of cash value that can be borrowed against in times of need, such as to help pay for a child's education or to help fund retirement. Here's what you need to know about taking loans against your permanent life insurance policy.
How Policy Loans Work
Permanent life insurance accumulates cash value tax-deferred, and you may borrow up to the amount of the accumulated cash value through one or more loans. A loan against your life insurance policy accrues interest and reduces the death benefit.
Potential Pitfalls You'll Want to Avoid
When you take out a loan against your life insurance policy, it's important to understand the consequences. If you don't repay your loan?or at least repay the interest on the loan when due?it can have an adverse effect on your policy. Please note that:
- Loans against a policy must be paid back. If you die while a loan is outstanding, the amount of the loan, plus any unpaid interest, will be deducted from the death benefit. That means your beneficiaries may not receive the full legacy you intended them to have, and which they might need.
- Interest is charged on a policy loan and will be charged for as long as the loan is unpaid. If the annual loan interest is not paid when due, the loan itself will increase annually by the amount of the unpaid interest.
- If the policy loan is still outstanding when you surrender your policy or it lapses, the amount of the loan (including interest due) will be considered taxable income to the extent that there is gain in the policy.
- If you use Whole Life dividends (which are not guaranteed) that have been set aside to pay premiums in a "POP"("Premium Offset") arrangement to repay a loan or interest on a loan, your "POP"arrangement can be compromised. There may not be enough dividends to continue to cover the premium and repay the loan or interest. If this happens, you may have to pay additional out-of-pocket premiums that you hadn't planned for.
What You Can Do
Before taking out a policy loan, we encourage you to contact New York Life to get more information about the financial impact a policy loan could have on your policy. If you have loans out on your policy, ask to see a policy illustration showing the current impact of your loan on your policy's death benefit. Also, discuss with your representative the amount of taxable income, should the policy lapse or be surrendered.
Another good rule of thumb is to at least consider paying the annual interest due on your policy loan each year to prevent your loan from increasing. And, if and when you decide to repay the loan, your representative can help you plan a disciplined loan repayment program.
In addition to your representative, you can speak directly with a service representative at 1-800-695-4331 or view your policy information on the New York Life Virtual Service Center at www.newyorklife.com/vsc4/welcome with a valid User Name and Password
Our Best Advice
Weigh your immediate financial need against the potential future impact of loan interest accumulation and a reduced death benefit. Review your situation with a New York Life representative to understand the total policy loan picture. Going forward, regularly check your loan status to keep track of your loan and unpaid loan interest accumulation. The ability to take loans on your policy is a valuable feature of permanent life insurance. You'll want to make sure that taking advantage of it to fulfill a short-term cash need won't conflict with your long-term financial protection goals.
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Consult an Agent:
At no charge to you, a New York Life Agent — professionally trained and experienced — can help you analyze your needs and recommend appropriate solutions through insurance and financial products and concepts. Request a no-obligation review with a New York Life Agent.
New York Life Insurance and Annuity Company does not provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.
|What You Should Know About Policy Loans|