Some policyholders who find themselves in need of cash may think borrowing from their cash value life insurance policy is a good bet. But a report says these people often aren't considering the financial consequences of such an action.
Bankrate.com said consumers often purchase a whole life insurance policy for the explicit purpose of borrowing from it later in life, however many don't understand the financial ramifications of the move. These loans are pulled from a policyholder's death benefit, and while they don't need to be repaid like a standard loan, they are charged interest and that needs to be repaid.
Paying off that interest with dividends or other loans could also be problematic because it may not cover the full amount of the interest. What's left could be considered income by the Internal Revenue Service, and though the policyholder did not receive a dime of that income, they will have to pay it off, says Bankrate.
Ultimately, playing with one's life insurance policy could be a risky endeavor. Experts say the smartest move for most consumers may be to purchase a term life insurance policy that simply covers income replacement in the event of their passing.