When it pays to borrow on your cash-value insurance

Many insurance policy owners have the option of borrowing money on those policies, often at a low interest rate. What is the earning rate needed to make a worthwhile return on money borrowed from a cash-value insurance policy?

One reader recently wrote: "I have $1,800 in cash value accumulated in an insurance company. I can borrow this cash at 6 percent interest. I earn about or insured certidicate of deposit to pay income tax ans still show some return?"

The 6 percent rate of interest is guaranteed in your policy and is a benefit you are entitled to. If you borrow the cash valeu of your insurance, the beneficiary death benefits will be reduced by the total of the amount borrowed, plus any accrued interest outstanding at death. However, if you invest those borrowed funds in some relatively secure place, you can boost the value of your overall estate.

While your insurance company increases your policy's cash value annually, you won't get that cash value unless you cancel the policy. Further, your beneficiary will not get the cash value -- only the death benefits.

Should you borrow funds, the interest you pay and the money you make from your investments will affect your income tax. If you borrow $1,800 at a rate of 6 percent, the interest payable for one year will be $108. If yu pay this interest in cash, it is deductible when calculating your income tax on the long form 1040.

Similarly, if you borrow $1,800 and invest it, your earnings are subject to income tax as additional income. if your investment earns 6 percent even, the earnings exactly offset interest paid, and there is no benefit to you and no net taxes due. Thus, yur floor is a 6 percent earnings rate. Any earnings above the 6-percent level will make you money, and only the earnings tht exceed the 6 -percent loan rate will be taxed.