If you carry whole life insurance and have a bank account that’s been hard-hit by the coronavirus pandemic, you might consider borrowing against your policy. Tap your insurance in the wrong way, though, and you could create as many financial problems as you solve.
Unlike a term life policy, which has no value other than what it pays when you die, whole-life insurance has a cash value independent of the death benefit. You can borrow against that value as needed, as I did when I tapped my own policy for $500 decades ago. Given to me as a child by my mother’s father, and with a modest death benefit, the plan was to make sure that I would always have insurance, and to give me an asset that I could borrow against if need be.
Health Savings Account (HSA)
Another option to consider to save you money without borrowing against your life insurance policy is to acquire a Health Savings Account. The Health Savings Account is one of the most powerful pieces of a well-designed health-care strategy. It includes saving money, saving taxes, building a tax-free bucket for health care and, most importantly, taking control of your own health-care strategy. You save money because in order to have an HSA, you have to have a high-deductible health-care plan (which usually means you’ll have a lower premium with a higher deductible and be able to save money).
Also, you save taxes because you get a tax deduction when contributing to your HSA. At the same time, you build a tax-free bucket of money in an HSA, just like an IRA. The money can be invested, the growth is tax-free and withdrawals for health care are also tax-free.
Finally, you take control of many health-care decisions because you can pay cash out of your has and there’s no insurance company between you and your health-care provider where you can control your care and negotiate for lower prices.
The taxman could cometh
As if cancellation of the policy for non-payment isn’t bad enough, you’ll also owe income taxes on the difference between what you paid into the policy and the loan and interest payments you took out. “This is a trap for the unwary,” says New York-based financial advisor David Mendels. “The insurance company is happy to let you treat each unpaid interest payment as effectively a new loan. There’s no tax due until you either decide to or are forced to cancel the policy.”
You can take a loan and let the policy lapse on purpose, as long as you plan for the tax bill. That’s what Peter Lazaroff, a financial planner in St. Louis, Missouri, did when he bought his first house. He borrowed $30,000 against a whole life policy his parents bought when he was a baby. Three years later, the policy lapsed and Lazaroff paid taxes on about $15,000 — the difference between the premiums paid on the policy and Lazaroff’s loan principal and interest.
Overall, though, you should probably approach borrowing against a whole life policy with caution. “I wouldn’t rule it out, but it wouldn’t be my first choice,” financial advisor Mendels says. “Better choices might include a zero percentage credit card offer, a home equity line of credit, or an emergency fund.” Tapping retirement funds, he says, is a worse choice.
Fresno Retirement Advisor Takeaways
As your Fresno retirement plan consultant we felt the following ideas were top notch: Tap your insurance in the wrong way, though, and you could create as many financial problems as you solve. Unlike a term life policy, which has no value other than what it pays when you die, whole-life insurance has a cash value independent of the death benefit. Overall, though, you should probably approach borrowing against a whole life policy with caution. Better choices might include a zero percentage credit card offer, a home equity line of credit, or an emergency fund.
Diversifying your retirement assets among a variety of vehicles and alternatives—both insurance and investment oriented, depending on what is appropriate for your situation—may offer you a better chance of meeting your retirement income goals throughout your lifespan. We help our clients with problems sometimes associated with retirement such as stopping spend down and avoiding probate. In doing so we leverage stop spend down as well as long-term care strategies designed to help accomplish those goals.
When searching for Fresno financial advisors, look no further than Soutas Financial & Insurance Solutions Inc. your Fresno financial planner is committed to helping take the complexity out of retirement planning. By using a variety of insurance and investment strategies that focus on Asset Protection, Long-Term Care Strategies, Legacy Planning, Tax-Efficient Strategies, IRA, 401(k) & 403(b) Rollovers, Life Insurance Annuities, Medicare, we can help you develop an overall retirement income strategy specific to you and your family. We have a strong team of professionals helping ensure you receive all the assistance you need not only in developing your retirement income strategy, but in maintaining it throughout your retirement. Contact us today at 559-230-1648 or visit us today at Soutas Financial to get your retirement plans on track for success!
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We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
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