Borrowing Against Insurance

You may be able to borrow against your insurance coverage, depending on what type of policy you have.

Cash value life insurance products -- such as whole life or universal life (but not term) typically allow the policyholder access to a portion of the funds in the account. It is as if you borrow money from the insurance company and pledge the cash value of your account as collateral. The loan rates tend to be reasonable; plus, the insurance company continues to credit interest to your account, so your net borrowing cost can be as little as two percentage points. The danger is that with borrowing against your insurance is that if you subsequently fail to pay adequate premiums, your policy could lapse.

Annuity products, usually created by insurance companies (and which have insurance and investment characteristics), no longer offer loan provisions. Instead, deferred annuity holders can access part of their account balance through the "free corridor" provision. Up to 10 percent of the account value can be withdrawn annually without penalty, though gains are typically subject to taxation.

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