Universal life policies allow you to borrow against your cash value, usually at interest rates below what you can get elsewhere, even for loans secured against other assets. However, borrowing against your policy generally lowers the interest you receive on your cash value, making it equal to or less than the interest at which you borrow.
For example, say that you earn 4 percent on the first $500 of cash value and 7 percent on any amount in excess of that $500. You now have an accumulated cash value, or surrender value, of $7,874. You can borrow $3,000 against this policy at a 6 percent interest rate — well below what you can get at a bank (even for another type of secured loan) — so this deal is quite good if you need the cash. But the interest you earn on the cash value of the insurance policy is no longer the 7 percent of the amount over $500. In fact, the interest you earn takes into account the $3,000 you borrowed, and the total interest you earn on your account is
For example, say that you earn 4 percent on the first $500 of cash value and 7 percent on any amount in excess of that $500. You now have an accumulated cash value, or surrender value, of $7,874. You can borrow $3,000 against this policy at a 6 percent interest rate — well below what you can get at a bank (even for another type of secured loan) — so this deal is quite good if you need the cash. But the interest you earn on the cash value of the insurance policy is no longer the 7 percent of the amount over $500. In fact, the interest you earn takes into account the $3,000 you borrowed, and the total interest you earn on your account is
- 4 percent on the first $500
- 6 percent on the next $3,000 (the amount borrowed)
- 7 percent on the balance
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