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Hi,

I was just wondering if it was a good idea to take out a loan against a life insurance policy to pay off credit cards?
Just wanted to know what the consequences were? What kind of interest rates can I expect? Is it a good idea, in general?

Getting a credit card with 0% BT isn't working out because credit score is pretty low right now. I thought the loan thing would be a good option. Just wanted some opinions.

Thanks

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Is it a good idea to have an insurance policy that has a cash value you can borrow against?

- No -

Does it make sense to have such a policy when one is struggling to pay off credit cards?

- Absolutely no -

edit: You could/should provide more details. But that would only be for my education/academic purposes. I doubt it would change the answers provided above.

But now that you've been helped, why not share the details?



Hey,

I already have the insurance policy. It's been set up for several years. The credit card debt issue was a one time thing due to a financial setback. I'm just asking if borrowing against it is a good idea.

Thanks

Just want to pay them off once and for all.

No. Cancel the frg'in policy and use whatever cash value to pay down the cards.

edit: But first, call the insurance company to make sure your policy is actually one that has a cash value. And that you aren't just confused into thinking all life insurance policies have loan provisions. Term doesn't.

Yeah I understand that. I would cancel it but I want to keep it for the future. I think it is a good investment.

coolnad17 said: [Q]I think it is a good investment.

edit: It's almost certainly not. Especially if you have outstanding non-zero CC balance.

edit: I've got to go tend to the B&M world. But if you would like to post more details about the situation I'll take a look later, perhaps tonight.

If I guessed you were less than 30 years old and had a policy with a face value of $100k or less that you purchased from a friend, would I be close?

I'm not under 30. Wish I was though. I thought life insurance would be a good investment for the kids, so I took out a policy a few years ago. The credit card thing is recent, like I mentioned, a rough financial patch.

Thanks for your help so far.

The piece of this puzzle that's confusing me is that you "took out a policy". You apparently already paid for the insurance? That would have cost a great deal if the insurance is worth anything. Unless you have a provision that's having your interest pay the premiums for you? Give us some more info about the premiums, insurance amount, cash value, etc... This is all assuming that it is in fact whole life insurance and not term. Cheers!

Hi there,

Well I guess I worded it wrong. I signed up for a policy a few years ago and have been making monthly payments on it. I just found out that you can take a loan out against it, an equity loan and I just wanted an opinion about that from people who have been through similar situations or have knowledge about it.

Thanks

edit: The face value is good > 200K and the monthly payment is quite low.

why are you so reluctant to share the details...

AGE ?
HEALTH PROBLEMS?
INSURANCE COMPANY?
FACE VALUE?
CURRENT CASH VALUE?
MONTHLY PAYMENT?
LOAN RATE?

no one can tell you if its wise without complete facts

cheese again?

Yeah. I pm'd him offering to examine the details. But lord knows I can't keep a secret.

OK, here's how policy loans work ... in general ...

1. The loan is taken against the available cash value of the policy. Similar to how a passbook savings-secured loan works.

2. The loan is made at an interest rate higher than the rate being paid on accumulated cash values. Once again, similar to how a passbook-secured loan works.

3. The loan essentially reduces the face value of the policy. If you have a $200k face value policy with a $40k available accumulated cash value and take out a $20k policy loan, your policy will pay out upon your death $200k minus the outstanding loan amount net of interest offsets either way.

The actual terms of the loan process were laid out in the policy documents given to you when you purchased your policy. And vary widely in terms of how interest rates, amortization periods, etc. are determined.

Generally cash value products are sold through agents who -- unlike me -- were paid thousands of dollars to answer your questions.

And also, similarly to passbook-secured loans, policy-secured loans tend to be a poor deal for the average borrower. (There's another recent thread on that subject.)

Fundamentally, if one has outstanding CC debt at anything other than near 0% teaser rates, the interest accumulated within the cash value policy is much much lower than the rate on the cards. The best financial decision in such cases is to cancel the policy, taking the full net proceeds to pay down the CC debt as far as possible.

Of course there are exceptions to any and all of the above. But since you don't want to provide any details, it's impossible to give you an exact answer.

edit: FWIW, it was a different game 25 years ago. But times, and products, have changed.

From past experience, it sounds like you purchased a whole life policy rather than term life. Basically, you pay a higher premium for lower coverage. I would also suggest you cash out your policy for whatever you can get and payoff your credit cards as much as possible. You should be able to go out and purchase a term life policy with a $200K payout for a smaller premium that what you are now paying and use the additional funds to paydown your credit cards faster. Once your credit cards are paid off, you can use the extra money you save in premiums and start investing it.

If you absolutely don't want to cash out your whole life policy, then I'd say yes, borrow the money against it and payoff your credit cards if the interest on the loan from the life insurance policy is less than the credit card interest. Bottom line is you need to do what makes sense to payoff your high interest loans (credit cards) or they will haunt you for years to come!

Just my 2 cents.

Soooo, did we manage to answer OP's question ... but just not with the answer he wanted?

[Q]Yeah I understand that. I would cancel it but I want to keep it for the future. I think it is a good investment.


It's not a good investment that can benefit you: insurance is bought for protection, should not be considered an investment -- you can only access its value by borrowing against it (paying the insurance company interest), cashing it out, or dying; permanent insurance is something that will only help your heirs.

Chances are only a very small percentage of the amount you pay becomes part of the cash value.


The reason to buy term insurance, is because you can responsibly invest the difference in premium (term insurance is cheaper) -- in addition to your regular retirement savings: most likely you live, and the term insurance expires worthless, if it doesn't expire worthless, then you've saved more than the cash value of permanent insurance would be.

If you don't have the discipline to invest the difference without fail, and save for your retirement, then permanent insurance is more sensible.


Most people plan on retiring eventually: if that won't be long after a level term insurance policy would expire, then you shouldn't need permanent life insurance, because you don't have a income from work to replace, that's primarily what life insurance is supposed to protect against (people who aren't working, from the death of the wage-earner).


If you plan on working for more than 30 years (I.E. longer than the term of the term insurance), and you need protection for a non-working spouse, or disabled family members living with you, then permanent insurance makes more sense.


Dracolith said: [QIf you plan on working for more than 30 years (I.E. longer than the term of the term insurance), and you need protection for a non-working spouse, or disabled family members living with you, then permanent insurance makes more sense.

No. Usually not.

Ok- I'm not exactly in the same position as OP. I have two small policies (12,300 and $5,600) both whole life that are adding cash value (my parents set these up for me when I was 7 yrs old). These together cost me about $10 per month. Two years ago I added a 30 yr term $500,000 policy (different company)- $54 a month. My father recently told me that the cash value on the policies are worthless and I should contact the agent to request that they instead build extra insurance value only. I called my agent yesterday to do this and he hasn't gotten back to me yet. Would it be prudent to just dump those small policies instead of asking for more added value? Currently the cash value on both policies is $4500.

You asked them to make a change without asking what the rate would be???

Can't provide a decent answer until you provide more of the info SiS suggested above.

But the short answer's likely to be cash them in.

SUCKISSTAPLES said: [Q]why are you so reluctant to share the details...

AGE ?
HEALTH PROBLEMS?
INSURANCE COMPANY?
FACE VALUE?
CURRENT CASH VALUE?
MONTHLY PAYMENT?
LOAN RATE?

no one can tell you if its wise without complete facts



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