National average credit card rates are approaching 15% and those with bad credit could end up with a rate close to 60%, according to an article published in CNN Money on January 28, 2011. New rules put in place under the CARD Act limit fess and preventing banks from raising rates retroactively so they make this up by charging more up front.
The increase in credit card rates make structured settlement transfers, life settlement transactions and life insurance policy loans more attractive.
Alternate sources of cash include borrowing on cash value life insurance. If you bought cash value life insurance a while ago, are in your 40s, 50s or 60s or 50s (assuming you have consistently paid premiums) you may have a fixed interest rate loan provision. The fixed rate will likely be far less than credit card rates. Newer policies may have a floating rate loan provision that still may be more favorable than credit card rates.
Benefits of life insurance loans: (1) No need for an application like a traditional bank loan or a new credit card, or court approval like a structured settlement payment factoring transaction and, if you are the policy owner, you can usually get your cash in less than a week; (2) no points, origination fees or closing costs (3) Although it makes sense to do so, you do not need to pay back the loan during your lifetime as long as you can afford to pay the interest. The loan becomes a set off against the death benefit when the claim is settled after your death. A life insurance loan is essentially an advance on your death benefit and is treated favorably for tax purposes. There is a limit to what you can borrow that is typically an aggregate of about 90% of the total policy cash value.
The downside of life insurance loans is (1)that you are reducing your life insurance benefit to the extent of the outstanding loan principal plus any unpaid accrued interest. It's important to assess the impact on your family's future needs before proceeding; (2) you must have enough cash flow to at least pay the loan interest to keep the policy in force. If the policy lapses it may trigger a taxable event, if the amount of cash plus money loaned out exceeds what you have paid in premium over the years. It is worth getting an in force ledger from your life insurance company to see the impact of the loan under different repayment scenarios, or just simply paying the interest; (3) Withdrawals from a Universal Life policy bring an added risk to extent that mortality, expense and investment returns in the policy are not guaranteed. Consider a life insurance loan if the debt you wish to pay down or pay off carries a higher interest rate than the rate charged on the life insurance loan.
For some people who cannot handle the carrying costs of a loan, or seniors who have no future need for life insurance, a life settlement may be appropriate. Ultimately a life settlement is possible because an investor (or group of investors) is willing to gamble on your life expectancy. The highest prices are available for the sick and elderly for obvious reasons.
For some people, selling structured settlement payment rights may be appropriate. Both life settlements and selling structured settlement payments come at a cost of trading a secure future cash flow for a reduced amount of cash. In the case of structured settlement factoring transactions (structured settlement transfer), the cash received is income tax free. The latter requires the approval of a Court to go through, after a hearing to determine whether the transaction is in your best interest as well as the best interest of your dependents. I've extensively covered the pitfalls of selling structured settlements on this blog for the last 5 plus years.
If you are seeking alternate financing and your options include disturbing a financial plan or product already in place, it is advisable to work with an experienced credentialed financial professional who can ask the right questions and explore your options with you. Band aids eventually have to be changed and a solutions which deals with a short term need in the context of a long term plan is sensible.
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