Donkey God

Life Insurance Policies

If you have a life insurance policy that offers cash benefits, you can borrow against it, up to the cash value in the policy. Interest rates, spelled out in the policy, are usually quite low. These loans are extremely flexible. You don’t have to pay them back within a certain time period. In fact, you don’t have to pay them back at all. The catch is, if you die before you have paid back the loan, the amount you owe will be subtracted from the total benefits before proceeds are given to your heirs. Borrowing against your life insurance policy may very well defeat the purpose of providing security for your family. If so, think twice before using one of these loans.

Retirement Plan Loans

You can usually borrow against your 401(k), 403(b), or company profit-sharing retirement plan. Loans are typically limited to 50 percent of the assets in your plan, up to a maximum of $50,000. Some companies also cap the total amount employees can borrow at a certain percentage of their salary. Interest rates on these loans are usually quite attractive. And while interest payments on 401(k) loans are generally not tax-deductible, total payments (including the interest) do go back into your 401(k), so it’s not as painful as paying a bank.

Unless you use your 401 (k) loan to buy your home, it must be paid back in full within five years. If you fail to make the deadline, the IRS will hit you with income taxes on the total amount of the loan, along with a penalty of 10 percent, if you are under the age of 59V2. In addition, when you leave your company, you will probably be required to fork over the balance you owe immediately, or within a month or two. Again, if you can’t make the deadline, you will be charged taxes on the borrowed amount and a 10 percent penalty.

The other big drawback is the interest or money you may forfeit in the long run by taking your retirement dollars out of higher-earning investments. When you borrow against these types of accounts, the interest you’ll earn on your retirement plan is zero. Although you pay interest to yourself as you pay back the loan, that’s not the same as earning a return from someone else by investing your money. A retirement loan taken out during a bull market can cost you thousands of dollars in retirement savings; taken out when the market drops or stays stagnant and you may come out ahead!