One of the advantages of owning permanent life insurance is that over time, the policy builds equity—also known as cash value.
Once accumulated, you can utilize this cash value at any time, for any reason … to cover unexpected expenses, help pay for a child’s education, supplement your retirement income or any other need you may have.
One way to do this is by taking a policy loan against a portion of the cash value.
But before you do, it's important to understand how the process works and what you'll be responsible for.
Here are four things you need to know:
1 – You’re borrowing money from Northwestern Mutual. If you choose to take a policy loan, you are borrowing money from Northwestern Mutual and using your policy’s cash value as collateral—much like a home equity loan uses your home as collateral.
2 – You'll be charged interest. Like other loans, you'll be charged interest. Policy loan interest accrues daily and is billed to you annually.
3 – You have to pay the money back. And, you’ll have to pay the money back.
But unlike other loans—where you make regular, monthly payments—there is no fixed repayment schedule with a policy loan.
You choose how and when you want to pay it back. Payments can be made whenever you like, for as much as you’d like.
But keep in mind … if you pay too little, or nothing at all, there are some risks.
As interest accumulates, the balance of your loan grows. If your outstanding loan balance equals your policy’s cash value, you’ll need to make a significant payment to keep your policy in force …
Or you’ll need to terminate your policy to repay the loan. And if that happens, your loved ones would be left without the insurance protection you intended.
4 - There may be tax consequences. In addition, if your policy terminates, there may be significant tax consequences.
Finally, if you pass away with an outstanding loan, the policy's death benefit will be reduced by the loan balance, plus any interest that’s owed. This results in a smaller death benefit being paid to your loved ones.
For all these reasons, it's important to carefully consider whether a policy loan is right for your situation.
It can be a good option if you have a short-term need and have a plan to pay the loan back.
If you have a longer-term need, talk with your financial representative. He or she can help you explore all the options available for your financial situation.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, WI (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries.