Insurance Loans for Retirees
Senior citizens may want to make use of some money from their retirement funds but they need to study the consequences of withdrawing cash from such funds and/or borrowing money against the cash value in their life insurance policies. If they need the money badly for some needs in their senior years like the hospitalization and medical expenses that they encounter more often as they advance in their years, it is not unusual that they resort to this move. After all they have been paying regularly the premiums on their insurance policies, and they have the right to avail of their benefits while they are still alive instead of just their heirs enjoying the proceeds of their life insurance.
Retirees who need extra money for emergencies or even leisurely travel and vacation in some tropical island often have the choice of withdrawing cash from their retirement account or borrowing against the equity in their life insurance policy. Both moves can have serious consequences, so they need to be studied carefully. To the retiree however, maybe he has done his part in being wise enough to buy such insurance policy before and paying for the premiums religiously for the benefit of his family just in case happens to him during the years when he was actively working.
But now that he has stopped working due to old age, he has the right to enjoy a part of such insurance policy while he still can. So even if he takes out an insurance loan to finance his travel to some exotic isle that he has just been dreaming about over the years, he has every right to do so. Even if his children object to the loan, they should allow their old man some fun now that he is in his sunset years. If he does not now take off for that island vacation now when else can he do it? Certainly not when he is already sleeping peacefully six feet under the ground.
A loan on the insurance policy of a person may have three attractions:
1.It is not taxable as long as the policy is in force. Definitely the policy is still in force even if the policy holder is already retired from working but has continued paying for the premiums of the policy.
2.The principal of the loan does not have to be repaid until the policy is dropped, canceled or the policyholder dies.
3.The interest rate on an insurance loan is usually an attractive fixed rate or a variable rate that the retiree previously agreed to. The interest though must be paid annually, either in cash or with policy dividends.
However, the insurance loan consequences can get much more complicated, depending upon the amount borrowed, the cash value in the policy, the dividends paid by the policy and the amount of the loan that is repaid each year. The retiree however may not care so much about these details – his attitude perhaps is just to enjoy the fruits of his savings in the form of the insurance coverage that he enjoys. He may be quiet about this in so far as his heirs are concerned, but then they are also largely on their own now, with their own families and their own incomes. They should let their father enjoy his last years on Earth the best way he thinks he should.
Normally the insurance company will not lend the policyholder more money than the current cash value of his insurance policy. However, if the loan is not repaid, the principal and accumulated interest can grow faster and larger than the cash value of the policy and this can put the policyholder (or the heirs) in a financial trap. The heirs perhaps may not want this to happen, but the retiree himself could perhaps care less. After all when he goes on to the next world there will be no insurance company that will hound him anymore.
The insurance company is not really lending the policyholder his own money, even if he has that much cash value in his policy. It is actually supposed to be lending company money, using the cash value as collateral and holding the equity to keep the policy in force. That’s a benefit to the policyholder because he continues to collect dividends on the policy, but as far as the adventurous retiree is concerned, his need for that vacation might be more his concern than any dividends that will come his way. He has been receiving those dividends yearly anyway – what he wants to have this year is that trip to the Bahamas, more than anything else.
If unwatched, the principal and interest can balloon to the point where the loan eventually exceeds the cash value, but this is more the concern of the insurance company, rather than the retired insurance policy holder. As it is their main business, the insurance company will then send the policyholder an annual bill requiring him to pay the difference between the debt and the cash value. They should be practical however to realize that the old man who has been giving them business over his lifetime may not bother so much any more about those collection letters. Especially if he has decided to extend his stay, or even for good, in that beautiful island paradise watching the waves (and occasionally the girls in their bikinis), the insurance company’s collection letters could stay unopened.
If the policyholder does not pay these latest bills, the insurance company can cancel the policy. This should however be more the concern of the children and the heirs of the old island vacationer blissfully watching his fishing rod all morning waiting for the fish to bite. Whether or not he has some tax obligations to pay back home, he could really care less. He has been paying his taxes religiously over the years, so his attitude now may not really be about them. That sea breeze and that tan he is enjoying can make him blind to all cares in the world. Give the old retiree his break. Insurance for his life? Let the children worry about that.
