Borrowing From Your Insurer

By Author: Norris Rios
Total Articles: 572
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When the credit was flowing, we never needed to look very far for those extra dollars. It could be a loan against the housing equity, an overdraft or simply agreeing a raise to the credit card limit. It was all the same and nothing need stand in the way of our spending. Then the river just dried up. Houses lost their equity and mortgages suddenly became a burden. Banks called in their overdrafts and credit limits came under pressure. Suddenly, we all became interested in paying down our debts. Yet, no matter how careful you are, there will always be emergencies. In these difficult economic times, you may have to agree to a wage freeze or, worse, a cut to keep your job. You may come down to liability insurance on your vehicle only to find yourself in an accident. Or you may be injured and need hospital treatment. In any such cases, you need cash to see yourself through a difficult time. You cast around, wondering where you can raise the extra dollars. Then you remember that agent talked you into buying insurance with a cash value. You take out the policy and there are options. You can surrender the policy. You can use the cash ...
... value as collateral for a loan from a third party. Or you can borrow part of the cash value from the insurance company. What should you do?

Well, the first part of the answer is straightforward. Insurance policies are not intended as short-term investments. The cash value the agent talked about only grows very slowly. In a recession, the growth gets even slower. So, before you get excited, you need to find out exactly how much the policy is worth. It may literally not be worth touching if you have only had the policy for a few years. Even if there is a value, you should use it only as a last resort. In twenty or thirty years time, it will have grown to a reasonable amount. Sacrificing that for cash now is a big decision. So let's assume you are desperate.

The first option of surrendering the policy is the worst. The insurer will only pay you a small amount to cancel the policy. You will do better to sell the policy through one of the life settlement exchanges. You can find a good level of competition from banks and investors prepared to pay more than the surrender value to buy your policy. Secondly, if you are proposing to borrow using the policy as collateral, make sure you do not default otherwise you will lose the policy. Thirdly, borrowing from the life insurance company itself is only sensible if you have a plan for steady repayment. You will be charged a fee plus interest and, if you do not pay back the loan, these charges will take a big slice of the remaining value of the policy. In short, life insurance policies are possible sources of money but you should only tap into them if you understand the risks. Add in potential tax problems and you should get professional advice to make sure you avoid problems.