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How Soon Can You Borrow Against a Life Insurance Policy?

Needs arise from time to time in our lives that require financial funds above and beyond what we have immediate access to. One option to such unexpected needs is obtaining a loan from your life insurance policy.

A life insurance policy is purchased to protect against the future needs of a premature death. Whole life and universal life insurance include the ability to build a cash value in addition to a death benefit. This cash value continues to accumulate while it is in force or when the policy is fully paid. “In force” refers to the policyholder upholding the premium payments according to the policy conditions.

When can I borrow against my whole life insurance policy?

You are able to borrow from a whole life insurance if the cash value has accumulated with the funds to cover the amount you want to borrow.

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Normally, most insurance companies will loan only up to 90% of the cash value accumulated.

The benefits of a life insurance loan

Borrowed money from your life insurance policy has some benefits. Your credit is not affected because there is no credit report run on you. There is no approval process, and if the loan is repaid according to the conditions of the contract, the IRS does not view the loan as taxable income.

How a loan works with a cash value withdrawal

Before considering taking a loan out from your life insurance policy, it’s important to understand how it may affect the policy.

For a guaranteed life insurance plan, the money borrowed and withdrawn does not affect the original policy death benefit coverage. A life insurance company may lend the insurer the money along with interest 2.The death benefit nor the cash value accumulated is affected. The cash value fund will continue to build each month when premiums are made toward the whole life policy. The loan is separate from the cash value but cannot exceed the cash value accumulated. A guaranteed life insurance policy protects the death benefit amount as long as the premium is paid regularly.

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What happens if I fail to pay the borrowed amount back, such as in the case of a premature death?

If the policyholder has not paid back the loan because of a death claim, the company will deduct the loan balance from the death benefit before funds are distributed to the beneficiary.

If there has not been a death claim, and the loan is not paid in a timely manner, the policy can lapse, and you may be taxed on the loan amount 3.

Examine why you want to borrow

The cash value in a life insurance policy is a feature used in different cases. A common reason is once the life insurance policy is fully paid, such as in the case of retirement, the cash value may help with living expenses.

Other reasons may include emergencies that need funding, such as medical and hospital expenses. You may consider buying supplemental insurances such as accidental, hospital indemnity, cancer, and critical illness as a helpful way to defray additional expenses incurred if you have an accident or medical issues.

It’s reassuring to have whole life insurance and a cash value plan

Whatever reason you need to borrow, carefully consider how much and for how long you want to make these additional payments in addition to your premium payments. Depending on the insurance company and the loan arrangement, it is important to understand how the loan is arranged and how it affects your policy 4.

It is reassuring that as your money grows, you have resources available. Buying a whole life insurance policy helps protect your loved ones.

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