Borrowing against the cash value of your permanent life insurance policy is rather simple, and unlike other loans, there are no qualifications needed aside from the potential amount of cash that is available. Life insurance policies can be used for really any purpose and can be paid back at any moment that you decide to do so.
Life insurance loans can also be relatively low in terms of interest rates, which is a large perk in terms of utilizing this option. While this option is among the most positive and beneficial for borrowing, if you somehow become unable to pay the loan’s interest rate and the policy lapses, then your life insurance coverage may be terminated and you can be in risk of having a substantial tax payment.
Borrowing Against a Life Insurance Policy – Is it Possible?
Yes, it is possible to borrow against your life insurance policy. As you pay premiums for your cash value life insurance policy (this would be a whole or universal life insurance policy), a portion of your premium is also going to go toward the cash value. As you continue to pay your premiums over time, then the cash value grows over time through the interest rate that is established within the policy terms.
This will ultimately become equivalent to the amount of money that would be received if you surrendered the policy to the insurer. If you have a permanent life insurance policy that is accumulating a cash value through premiums, then you can borrow the money eventually. This is only after your cash value has reached a particular size, usually after a few years of paying premiums.
Term life insurance policies are considered much cheaper than any permanent policies because they do not tend to have a cash value component, which does not allow you to borrow against them and will not give you any money in return.
How Much Can I Borrow From My Life Insurance Policy?
The answer to this question varies from each insurance provider, but the maximum policy loan can be at least around 90% of the overall cash value. Usually, there is not a set minimum that you are allowed to borrow.
It is commonly confused that when you take out a policy loan that you are removing money from the cash value. What you are actually doing is taking a loan from your insurance provider and then the cash is there as collateral, just in case you are unable to pay it back. This is extremely beneficial because of the cash value utilized as collateral stays inside your life insurance policy and will then continue to accumulate interest, even if it is at a different rate.
In addition to the cash value staying inside your life insurance policy, you will not need to pay the loan back within a set period of time, as this is usually required by other loan forms. While this is beneficial, if you do not pay the annual fixed or variable interest rate, then your interest payment will be then added to the value of your outstanding loan, which will be harmful to you after compounding interest if the policy loan lasts multiple years. If the outstanding loan ends up reaching the size of your policy’s cash value, then your policy will then lapse. When your policy lapses, you will not only lose your coverage, but you will also pay income tax on the outstanding loan that becomes greater than the overall amount you have paid in premiums over the years. Therefore, try to make sure that this never happens to you and that you are capable of paying the annual interest rate!
Taking out a Life Insurance Policy Loan – How to Do It
Taking out a life insurance policy loan is much more simple than taking out your other standard forms of loans. All you will have to do is fill out a form the insurer and then you will then get the money deposited into your account within only a few days.
When filling out the form, you will need to confirm your identity, sign a confirmation document, or provide a notarized confirmation before receiving your loan. You will only have to do this if you have provided new account information to your insurance provider in the last month, your policy has changed ownership within the last few months, or your loan exceeds a certain size.
Paying Back a Life Insurance Policy Loan
After borrowing your life insurance policy, you will not have to pay back the loan or pay the annual interest as long as your total outstanding loan does not exceed the policy’s cash value. If your loan is not above your policy’s cash value or you can afford the annual interest payments, then borrowing from a life insurance provider is a great and beneficial option if you are unsure as to how long you will need to loan.
Having said that, it is beneficial to pay back your loan in a timely manner to ensure that your interest does not compound heavily and your outstanding loan gets too large, ultimately making it impossible to pay. It is also important to pay back the loan in a timely manner because the total outstanding balance would be deducted from any death benefits your beneficiaries will receive if you were to pass away. Overall, borrowing from your life insurance provider is a rather positive experience and is extremely beneficial.