A life insurance policy is a great way to get cash when you need it. You can borrow against the cash value of your policy and use the money for any purpose. There are no loan requirements or qualifications, and you can pay the loan back whenever you want.
Life insurance policy loans have relatively low-interest rates, making them a great option when you need extra cash.
Assuming you can keep up with your payments, taking out a loan against your life insurance policy is an easy way to access cash. However, defaulting on paying back this loan and the interest could result in a reduction of the death benefit if you were to die with an outstanding loan balance.
In some cases, you could even end up losing your life insurance coverage.
First and foremost, you cannot borrow money from a term or accidental death life insurance policy since these types of policies do not have a cash value component that builds over time. All premium dollars are applied to the cost of life insurance and any fees charged by the insurer.
Permanent life insurance is the only type of life insurance that builds cash value and provides an option to borrow against the cash value.
It’s important to understand that the money you borrow comes from the insurance company and not your policy’s cash value. However, your cash value account is collateralized to the extent of the loan.
Moreover, your collateralized cash value will continue to earn interest and dividends (if the policy is a participating policy), and therefore, your cash value account will continue to grow. The types of insurance policies you can borrow against are policies that have a cash value account such as Whole Life Insurance, Variable Life Insurance, and Universal Life Insurance.
When there is enough cash value, life insurance policies can be used to take out a loan. The amount that can be borrowed is calculated as a percentage of the cash value. Most life insurance companies have rules in place dictating how much policyholders can borrow, but generally speaking, you can expect to be able to borrow between 90% and 95% of the cash value.
A typical example would be if your whole life policy has accumulated $25,000 over time, the insurance would typically lend between $22,500 and $23,750. Generally, the insurer will charge a small fee for making the loan and will also charge interest for the life of the loan.
The insurer will also attempt to make certain that your policy does not lapse as a result of the loan.
Additionally, the loan proceeds to you are tax-exempt because the money you’ve borrowed from the insurance company is not considered income.
When you take out a loan on your life insurance, there is no repayment schedule that you must adhere to, thus there are no late payment fees. In fact, you do not have to pay back the loan at all because the insurance company will simply deduct any outstanding loan and interest from the death benefit when you die.
However, when taking out a loan, it is important to be aware of the effects of compounding interest. This is especially true for loans that span over many years. With compounding interest, the total amount of the loan can quickly become much larger than the original sum borrowed.
Furthermore, loans that reach the size of the policy’s cash value can cause the policy to lapse. This would not only mean losing coverage but also having to pay a large tax bill.
Life insurance policy loans don’t have a specified repayment period, which means you can take as long as you want to repay the loan. However, interest accumulates on the loan over time, so it’s best to repay the loan in a timely manner to avoid any negative consequences.
Most insurance professionals recommend setting up a personal schedule for repaying your loan that fits within your budget. Generally, the insurance company will provide a method to make payments outside of your normal insurance premium.
If you have more than one outstanding loan, we recommend that you keep track of each one and make your payments accordingly. Your insurance company will send you an annual statement for your account that will illustrate outstanding loans, amounts repaid, and interest that has been charged for the loan.
If you are considering borrowing money from your permanent life insurance policy, you should consider these pros and cons and also have a frank discussion with your insurance professional.
You can borrow from a life insurance policy as soon as there is enough cash value built up to take a loan in the amount you need. Depending on how your policy is structured, this can take several years to accumulate.
You can only borrow from a life insurance policy that has a cash-value account like Whole Life, Universal Life, or Variable Life insurance.
Most insurance companies charge very competitive rates that are typically between 5% and 7%.
When you borrow against your policy, the company will collateralize the loan with your cash value account. However your cash value will continue to earn interest and dividends.
If you are considering taking a loan out on your life insurance policy, by all means, CALL YOUR INSURANCE COMPANY.
If you are considering purchasing life insurance and you want to be able to access the cash value through policy loans, call the experts at LifeInsure.com for expert advice and a free no-obligation quote.
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