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Are Life Insurance Loans a Bad Idea?


12:20

Are Life Insurance Loans a Bad Idea?

Sometimes the unexpected happens and you need cash. Borrowing from your life insurance policy is one option.

Your cash-value whole, universal or variable universal life policy can appear a tempting source for a bailout, especially if you've been paying into it for years. After all, the quick-cash loan option was one of the features that sold you on permanent life insurance in the first place.

But before you borrow from your policy, consider the dangers ahead should you neglect to pay the interest on your loan -- or worse, trust that the dividends from your variable universal life insurance policy will automatically cover it.

"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," says Al Barnes, a life insurance specialist in Alabama. "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."

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