Secured Loan or Collateral Loan: Policy Implications

It can be tempting to tap into the cash value of a life insurance policy that has been accumulating for many years. However, unlike normal investment accounts, accessing life insurance cash value is not a straightforward process. There are three ways to access your cash value: surrender, policy loan, or a secured loan. Each method has implications that should be fully understood as they can have a serious impact on your tax bill.

Over this series of articles, we will look at defining these methods as well as exploring their implications.

Last week, we looked at the definition of Secured Loan or Collateral Loan. Now – to sum up our series, we bring you the implications of using this method to access your cash value.

Tax Implications
Secured loans are a popular option for accessing cash value because there are no tax consequences when the loan is issued. In fact, the interest from the secured loan may be deductible if being used to earn income.

Policy Implications
Secured loans are a separate entity from the life insurance policy and therefore there are no immediate implications to the actual policy. However, when the insured on the policy dies the secured loan must be paid back before any benefits are paid to the policy beneficiaries.

It is always best to consult a professional before making any decisions regarding your policies cash value. Not only are there tax implications that need to be considered, additional income can affect government benefits and should therefore be taken strategically.

Definitions

ACB – Adjusted Cost Basis
The ACB of the policy is the sum of the premiums paid into the policy minus the actual cost of the insurance policy or NCPI (Net cost of Pure insurance). Similar to the purchase price of a stock or a building to ensure that your original capital does not get taxed again.

Lapsing
This means that your policy loan now exceeds your policies cash value causing your policy to be in jeopardy of being cancelled. If a premium is not paid within 30 days, the policy will be cancelled.

CSV – Cash Surrender Value
The CSV is the value that the policy owner would receive if they cancelled their permanent life insurance policy.