What happens if I borrow the cash value for college funding or an emergency?
When you withdraw cash value through a plicy loan, there are generally no income tax consequences, provided the policy is not a modified endowment contract. • How does a modified endowment contract (“MEC”) differ? MECs are life insurance policies that are considered to be more investment-oriented than non-MECs because the ratio of cash value to death benefit is higher than in typical non-MEC life insurance policies. As a result, unlike with non-MEC policies, policy loans, assignments and surrenders of cash value are generally taxable on an income-first basis. Additionally, distributions poior to age 59½ are subject to a 10% penalty tax on any gains. Death benefits, however, are generally received by beneficiaries income tax-free, the same as non-MEC policies. • Are there any drawbacks to borrowing the cash value? There are two possible drawbacks. First, the proceeds to your beneficiary at your death will be reduced by the amount of any unpaid loan and loan interst. Second, the cash val