CARTOONS BY CHRIS BRITT

HOW DOES IT WORK?
The whole life policy increases in value through investment and your monthly
premium payments. Over time, there are two values in your policy: the face value and
the cash value and you can get loans against the cash value portion. You do not need
approval for this loan and there is no credit check. You don’t even need to tell the
insurance company what you plan to use the money for. Just remember that while the
money is a loan and isn’t taxed, you will have to pay the money back with interest.
However, the rates can be much lower than any bank loan and there is no mandatory
monthly payment.
With a term life insurance policy for the purpose of securing a business loan, you, the
business owner, are the insured person and can also be the owner of the policy. You pay
the premium for the policy. The bank or lending institution is the primary beneficiary
while the loan is outstanding. If you pursue this type of life insurance, you’ll need to sign
a loan collateral assignment form to assign the bank as the recipient of the policy’s death
benefit as long as the loan is in effect. Usually the bank will work with the insurance
company to coordinate the execution of the form.
ADVANTAGES
Lifetime protection. Your premiums remain the same throughout your life. It doesn’t
expire or go down in value.
Low interest rates. The interest rates for borrowing against the policy are below that of a
bank and the repayment terms are favorable.
Flexible terms. You may borrow the funds for any reason with flexible repayment terms.
The funds are secured against the death benefit of the policy.
DISADVANTAGES
High costs. The premiums to get whole life insurance are expensive compared to term
life insurance.
Cash value is minimal for several years. This is not a near term strategy. Your premiums
are high and your cash value grows slowly over time. It can potentially take 10 to 20 years
for your cash values to equal the amount of premiums paid into the policy. This is not a
short-term solution.
Potential tax liability. Outstanding loan balances may trigger tax implications if you
borrow more than you’ve saved (due to growth) and choose to cancel or surrender your
policy at a later date.
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