The decision to borrow against your estate should never be taken lightly. Depending on the types of assets that your estate comprises, you have several options. While you may feel your retirement income won't do you any good if you don't fix your current situation, explore all your options before proceeding. Be sure you understand exactly what it will entail when it comes to penalties and taxes.
One option for borrowing against your estate is life insurance. If you borrow against your policy, you may or may not have to pay interest depending on your insurance company's policies. If you do not pay it back, the company will simply reduce the amount payable upon death by that sum. You will not be able to borrow the full amount. Your policy has what is known as a cash surrender value. The CSV is the amount of cash for which your policy may be redeemed. This is typically the maximum you may borrow.
A 401(k) or 403(b) is another option for borrowing against your estate. The specifics will depend on your company's plan. The first thing you need to consider is how vested you are. Even then, you will likely only be able to borrow up to half of your vested balance with a cap set by the company. You will pay interest, but that interest goes toward your account. If you don't pay it back, you will be required to pay federal income taxes and a 10 percent penalty.
If you come across a situation later in life after you've built equity in your home, consider a reverse mortgage. To qualify for a reverse mortgage, you must be at least 62 years old. As of Dec. 2011, the maximum home value for a reverse mortgage was $625,000. The lender takes the mortgage and gives you the money. You maintain the deed. The lender only takes possession when you die or otherwise vacate the home. The disadvantage is that the property is left to the bank as opposed to your heirs.
An annuity is similar to life insurance. You make a series payments to a company in exchange for receiving payment later in life, either as a lump sum or in installments. You may borrow against this policy much like your life insurance. The IRS allows you to borrow up to half the value of your annuity, provided you pay it back within five years.
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