Understanding the Process of Borrowing from Your Life Insurance Policy

What you need to know about borrowing from your life insurance.pile of cash

If you have a whole life or universal life insurance policy, then you have the option to borrow against your policy’s cash value.  But is taking a loan from your life insurance policy a good idea?  Here’s what you need to know.

The Pros and Cons of Borrowing from Your Policy

Before you take a loan from your life insurance policy, it’s important to understand what it will do to your coverage.  Here are some of the positives and negatives to consider.

  • Pros:
    • You can bypass the lengthy loan application process that you would have to go through to secure a traditional loan.
    • You can borrow without having to go through a credit check.
    • Taking a loan from your life insurance policy will not show up on your credit report like a traditional loan would.
    • Life insurance policy loans charge lower interest rates; 5-8% versus the 10-13.9% seen on personal loans or credit cards.
    • You have the ability to pay back the loan on your own schedule.
    • If you do not repay the loan, it will just be deducted from your policy’s death benefit.
  • Cons:
    • You cannot take a loan from your life insurance policy until you have accumulated enough cash value. This may take several years.
    • If you do not repay the loan, you risk leaving your loved ones with insufficient life insurance coverage.
    • If the unpaid loan and the amount of interest that you have accrued add up to more than the policy’s cash value, then you risk losing the policy completely.
    • You may have to pay income taxes on the loan proceeds if the policy lapses and you don’t repay the loan in full.
    • You won’t have protection from creditors on your policy’s cash value if you take it out as a loan.

How to Borrow from Your Life Insurance Policy

When you borrow based on the cash value of your life insurance policy, you are borrowing from the life insurance company.  These types of loans are much easier to secure than a traditional loan from a bank because the life insurance company will just use the cash value of your policy as collateral.  If you do not pay back your loan, then the insurance company takes the money you owe from the cash value portion of your policy or deduct it when your death benefit is distributed.  Just like regular loans, life insurance loans do have interest on them.  When you do not pay back your loan, you allow interest to compound, and your loan amount will only increase.  While the interest rates are lower than the ones on traditional loans, it can still add up.  Should your loan amount grow to exceed the value of your policy, you risk losing your life insurance policy altogether.

This is what you should know about borrowing from your life insurance policy.  Do you have more questions about your life insurance?  If so, then contact the experts at Desert Empire Insurance.  We are ready to assist you with all your coverage needs today.