A life insurance policy’s primary focus is to provide a benefit to the family upon the loss of a loved one. However, some policies could add enhancements to a financial portfolio by offering a cash value benefit. A cash value feature allows you to borrow money from a life insurance policy if you have paid the required amount of premiums. Though a cash value loan can be a good temporary solution to financial emergencies, it should require great consideration beforehand.
Before you decide to borrow from a policy, consider if borrowing from your life insurance policy is the best avenue for your situation.
CAN YOU BORROW MONEY FROM A TERM LIFE INSURANCE POLICY?
No, some life insurance policies such as a term life policy don’t accumulate a cash value. Term life insurance premiums are likely less expensive than whole life and only offer a death benefit, not cash value. However, most whole life or universal life insurance policies offer a cash value benefit that may allow you to take out a policy loan.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A WHOLE LIFE POLICY LOAN?
Before you decide to borrow from a policy, consider if borrowing from your life insurance policy is the best avenue for your situation. We’ve listed a few pros and cons below. Speak with your insurance company about how taking out a loan will impact your policy.
- Short application process
- If you have built up cash value, you can borrow without a credit check
- Policy loans don’t appear on your credit report
- Policy loans may have lower interest rates
- Repay the loan on a schedule you and your provider set
- You can chose not to repay the loan and just deduct the amount due from the beneficiary’s benefit
- Must have cash value built up which may take years from policy start date
- Risk a reduced death benefit for your beneficiary if loan is not repaid
- Risk losing your policy if the interest and unpaid loan amount total more than the remaining cash value
HOW DOES A WHOLE LIFE POLICY LOAN WORK?
When you borrow against your cash value from a whole life insurance policy, the insurance company uses the benefit as collateral. Meaning, if you repay the loan and the accrued interest in full, your policy benefit will go back to the original amount you purchased it for. However, if you do not pay it back, the company will deduct the loan amount plus interest from the policy benefit.
WHEN CAN YOU TAKE OUT A WHOLE LIFE POLICY LOAN?
You must build cash value before you can qualify for the loan. Reach out to your life insurance representative and he or she will be able to tell you what the cash value is. You should also discuss how taking out the loan will impact your policy.
WHAT SHOULD I CONSIDER WHEN TAKING OUT A WHOLE LIFE POLICY LOAN?
If you do not want to endanger your life insurance policy, consider the following when taking out a loan.
- How will taking out this loan impact my life insurance policy? Will I put my beneficiary’s benefit at risk?
- Aside from the interest, are there any other fees or costs I need to know about?
- I should create a mock budget and schedule on how I will pay the loan back to ensure this is feasible.
Taking out a whole life insurance policy loan should be treated the same as taking out a loan from the bank – with due diligence. Don’t forget the primary reason for a life insurance policy is to help take care of your beneficiaries should something happen to you. We know emergencies happen, so having cash value available could be a great help in financial adversity. Before taking out a policy loan, you should gather your research and consider every angle.