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Life insurance loans are not always a wise choice

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Life insurance loans are not always a wise choice

Borrowing against a life insurance policy may be a financial necessity for people who find themselves in need of money unexpectedly. Experts warn that people need to be careful of how the loan is handled, according to Bankrate.com.

"The biggest thing that people don't understand, including the agents selling it, is the intricate taxation that takes place inside a life insurance policy," Al Barnes, a life insurance specialist in Alabama, told the news source. "Borrowing from a cash value like that is sort of like building your house right on top of the San Andreas Fault - only you don't know the San Andreas Fault exists."

If a person has a cash value policy, such as a universal life insurance plan, they can usually borrow as much cash as the account has accumulated. That money does not have to be paid back if the person does not want to, because they are borrowing money that is already theirs, the media outlet reports.

However, if a person borrows against their policy and does not pay it back, that money will be deducted from their death benefit, according to MoneyInstructor.com. The policyholder will also be charged interest on the loan, which has to be paid back.  

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