Life insurance is often considered a safety net for loved ones, providing financial security in case of an untimely passing. However, policyholders may not realize that their life insurance policy can also serve as a financial tool while they’re still alive. If you need access to cash, you might be able to borrow from your life insurance, but is it the right choice for you?
In this article, we’ll explore whether you can take a loan from your life insurance and how to borrow against your policy. You may also want to consider alternative ways to tap into the value of your life insurance.
CAN YOU TAKE A LOAN FROM YOUR LIFE INSURANCE?
Yes, you can borrow from life insurance, but only if you have a permanent life insurance policy that builds cash value. Permanent policies include whole life or universal life insurance.
A permanent policy accumulates cash value over time, which can be used as collateral for a life insurance loan. In contrast, term life insurance does not build cash value, so it does not offer this borrowing option.
Specific life insurance policies may differ when it comes to loans, here’s how they compare:
- Whole life insurance: Whole life builds cash value that can be borrowed against, typically with fixed interest rates.
- Universal life insurance: Universal life accumulates cash value and often allows policy loans, typically with more flexibility in premium payments.
- Variable life insurance: Variable life insurance typically allows borrowing, but the cash value may depend on investment performance, making loan amounts more unpredictable.
- Term life insurance: Term policies do not accumulate cash value, meaning there is generally no borrowing option.
If you have a permanent policy with enough accumulated cash value, you may be eligible to borrow against it.
How Much Can You Borrow From Life Insurance?
The amount you can borrow from your life insurance depends on the accumulated cash value in your policy. Typically, insurers allow policyholders to borrow up to 90% of their cash value, but this varies by provider.
Keep in mind that borrowing may reduce the available death benefit, and unpaid loans likely accrue interest, which can impact the long-term value of your policy.
PROS AND CONS OF BORROWING FROM YOUR LIFE INSURANCE
Borrowing from your life insurance policy can be a convenient way to access funds, but it’s not without risks. You may want to weigh the advantages and disadvantages of borrowing from life insurance and consider alternative options.
Pros of Borrowing from Life Insurance
There are several benefits of getting a life insurance loan, including:
- No credit check: Since you’re borrowing from yourself, there’s generally no need for a credit check or approval process.
- Lower interest rates: Life insurance loans typically have lower interest rates compared to personal loans or credit cards.
- Flexible repayment: There are often no required monthly payments, giving you the freedom to pay back the loan on your schedule.
Cons of Borrowing From Life Insurance
Just as there are benefits to borrowing from life insurance, taking out a life insurance loan could have drawbacks such as:
- Death benefit reduction: If the loan is not repaid, the outstanding balance (plus interest) will most likely be deducted from the death benefit, leaving your beneficiaries with less.
- Accruing interest: Unpaid interest compounds over time, increasing the total amount owed.
- Risk of policy lapse: If the loan balance grows too large, the policy may lapse, potentially leaving you without coverage.
- Tax consequences if the policy lapses: If the policy lapses with an outstanding loan, the IRS may treat the unpaid amount as taxable income.
HOW TO BORROW MONEY FROM A LIFE INSURANCE POLICY
If you decide that borrowing from your life insurance policy is right for you, here’s how to go about it:
1. Check your policy: Confirm that your policy is permanent and has sufficient cash value to borrow against.
2. Contact your insurer: Speak with your insurance company to understand the loan terms, interest rates and potential impacts on your policy.
3. Request a loan: Once you’re ready, submit a loan request. The insurer will process it, and funds are usually available within a few days.
4. Plan for repayment: Paying off the loan over time can prevent it from reducing your death benefit or causing your policy to lapse.
ALTERNATIVE WAYS TO TAP INTO YOUR LIFE INSURANCE VALUE
Borrowing from your life insurance may not be the best way for everyone to access the value of their policy. Luckily, there are several alternatives you might want to consider instead of a loan against your policy, including:
- Withdraw cash value: You may be able to withdraw a portion of your cash value directly, though this may reduce your policy’s death benefit.
- Surrender your policy: If you no longer need coverage, you can surrender your policy and receive its cash surrender value, minus any fees. The surrender amount is generally significantly lower than the death benefit of the policy.
- Sell your life insurance policy through a life settlement: If you no longer need or want your policy, you may be able to sell it to a third-party investor for a lump sum, often greater than the surrender value but less than the death benefit.
Why Consider a Life Settlement?
A life settlement can be a great option if you no longer need your policy but want to maximize its value. Instead of borrowing against your policy or surrendering it for a lower amount, a life settlement allows you to receive a larger payout that you can use for other financial needs.
Working with a trusted life settlement broker, such as Life Settlement Advisors, could help you determine if a life settlement is the right choice for you.
TAPPING INTO THE VALUE OF YOUR LIFE INSURANCE
Borrowing from your life insurance policy can be a helpful financial tool, but it comes with risks that could impact your policy’s long-term value. Before taking out a loan, be sure to weigh the pros, cons and repayment options. You may also want to consider alternatives like life settlements if you no longer need your policy.
If you’re interested in exploring a life settlement as an alternative, contact Life Settlement Advisors to learn more about how you can maximize the value of your life insurance policy.
