One of the benefits of having a whole or permanent life insurance policy during retirement is that it
allows for tax-free loans from the accumulated cash values. These cash value reserves can provide
an essential source of postretirement income for lifestyle maintenance, emergency expenses and
major purchases. But it’s not always a good idea to take a loan—even if you can. Here are three
questions to ask yourself before you take that step.
1. Can you pay back the loan?
A loan is a loan is a loan—even when the loan is from your own cash values. That means there is
interest charged against the borrowed amount and you are generally expected to pay it back. An
unpaid life insurance loan can reduce your overall death benefit so you need to make sure you can
either pay back the loan or are willing to sacrifice some death benefit.
2. How will it impact your estate plan if it isn’t paid back?
Not only will an unpaid cash value loan reduce the overall death benefit paid to your heirs, it may
also increase your overall estate taxes if the funds increase your estate’s asset value. This can create
a double whammy of negative consequences for your survivors.
3. Will there be enough left in cash value to make premium payments?
Many people have a life insurance policy that will eventually self-fund through cash values applied
as premium payments. If you take a loan that depletes that cash value substantially, not only will
you want to make plans to pay it back but you’ll also have to make plans to keep maintaining your
premium payments each year. Remember—economic factors such as a market downturn or falling
interest rates can negatively impact your policy’s future growth and rush you headlong into a lapse
if you aren’t careful.
Life insurance loans can be extremely helpful in managing postretirement cash flow needs, but they
shouldn’t be entered into lightly.