How to Borrow Against Life Insurance

Borrowing against a life insurance policy is a viable option if you possess cash value life insurance, such as universal or whole life insurance. These policies allocate a portion of each premium payment towards building a tax-deferred cash value, acting as a savings or investment account. To access the cash value, it must reach a certain threshold, which can take several years. Cash value is exclusive to permanent life insurance policies and not available in term life insurance. While term life insurance does not accumulate cash value and expires after a specific period, permanent life insurance offers lifelong coverage and gradually builds cash value. Policy loans enable policyholders to borrow money from the insurance company, using the policy's death benefit and cash value as collateral. If the loan is repaid, the full value of the policy remains intact. However, failing to repay the loan before death results in the insurance company deducting the outstanding loan balance, including any interest owed, from the death benefit. Consequently, beneficiaries will receive a reduced payout. The process of borrowing against a life insurance policy does not involve an income or credit check since the loan is fully secured by the policy's cash value. Policy loans typically have lower interest rates compared to unsecured personal loans, and the loan application and repayment do not impact the credit score. However, not all life insurance policies offer a cash value to borrow against. Hence, it is essential to verify your policy type and cash value before considering a loan. If you have a convertible term life insurance policy, it might be possible to upgrade to whole or universal life insurance without a new health exam, potentially offering borrowing opportunities in the future. When taking a policy loan, it is crucial to understand the terms and consequences. The cash value must exceed a minimum amount before borrowing, and policy loans may have fewer credit and tax implications compared to other loan types. Policy loans are tax-free funding sources, and the money can be utilized as desired without strict repayment schedules. They also do not require credit checks or income verification, and the funds are typically deposited into your account promptly. Nonetheless, policy loans come with certain drawbacks. As you repay the loan, the coverage amount on your permanent life insurance policy decreases. If you pass away before repaying the loan, your loved ones will not receive the full death benefit. Additionally, if the loan is not repaid, the outstanding balance may exceed the cash value, potentially causing the policy to lapse and leaving you without insurance coverage. Before borrowing from your policy, verify your policy type, check the current cash value, and discuss the terms with your agent. Consider alternatives and weigh the impact of different choices on your beneficiaries and personal finances. If necessary, consult a financial advisor or estate planning attorney to understand the tax implications and potential consequences. Keep in mind that policy loans are only available for permanent life insurance policies with cash value components, such as whole or universal life insurance. For term life insurance, policy loans are not an option, as they lack cash value. If you're considering borrowing against your policy, it's crucial to make an informed decision and understand the potential implications for you and your loved ones.