Ms. EH is the owner and beneficiary of a $150,000 insurance policy on her mother’s life. Ms. EH has paid $46,000 premiums, and the policy is fully paid up (no more premiums are due). She needs money and is considering cashing in the policy for its $95,000 cash surrender value. Alternatively, she can borrow $70,000 against the policy from the insurance company. She will pay 5 percent annual interest (a nondeductible personal expense) and repay the loan from the death benefit. Ms. EH’s mother is in poor health and should live no more than 10 years. Ms. EH’s marginal tax rate is 25 percent. Assuming a 6 percent discount rate, should she cash in the policy or borrow against it?
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