Have you ever thought about borrowing against your life insurance policy? Can you really do that, and what are the benefits it brings? Before acting, here are a few things about life insurance policy loan that you should know.
What is a life insurance policy loan?
Besides benefits such as tax and death advantages, your life insurance policy (only apply for permanent life insurance – term life insurance does not have a cash value component) can produce some cash value as collateral to the loan. The cash value accumulates after ten years.
An insurance company provides the loans. And just as other types of loans, life insurance policy loans can cost you financial problems if the interests are not paid in due. And yes, there always are interests, but rest assured as the rate is mostly relatively low.
A life insurance policy loan may not have a minimum amount. Each insurance company has its own policy, but they often agree to lend if the loan is around 90%.
How can life insurance policy loan help?
A loan from a life insurance policy is a fantastic way to accumulate money fast and comfortably. But what is the best thing is that you must pay no tax to a life insurance policy loan if the money you borrow is less or equal to the insurance premium.
You do not need to go through an enormous amount of paperwork or credit check as you borrow against your assets. And there is no need to inform about the destination of the borrowed money. Even though you can make a loan from a life insurance policy for any reason, it is still best to consider special needs or emergencies, such as university or college expenses.
Things to keep in mind about life insurance policy loan
To avoid unwanted things for your beneficiaries, there are a few things you should note down before trying to borrow against your life insurance policy.
As mentioned above, a loan from a whole life insurance policy is the same as other loans. So what would happen if you do not pay back the loan in time and in full? It is one of the essential things needed to make clear.
The core purpose of life insurance is to make sure your beneficiaries have a well-leading life after your death. Borrowing too much from your own policy with an unpaid principal and interest or failing to repay, the total amount of money can be deducted from the policy itself. It means the death benefits will decrease. Moreover, there exist tax disadvantages for a large loan.
Furthermore, policy loans may not require your immediate payment, and sometimes they do not even have a payment schedule. Still, at this time, you should not neglect timely payment and always keep track of your interests.
Above are some real facts about life insurance policy loans that you should know before borrowing. However, there are some expected marks that you should also keep in mind after taking action. Counsel your agents or insurance companies for more information.
Frequently Asked Questions
Is it a clever idea to borrow from your life insurance?
In most cases, borrowing against your life insurance is a perfect choice. The remarkable thing about life insurance loans is that there exists no time burden, no check-up, no document hassles.
You can take out the money (from small to even a large amount) in just the blink of an eye. When you cannot immediately withdraw the cash from any emergency funds, a life insurance loan sounds best. And what makes the procedure fast is because you do not need to show any income proofs or credit checks to get the loan. Your financial stage already reflects on the insurance policy itself. And if you own life insurance for a long time, the amount of money you can borrow is much more significant than a bank loan.
Plus, the interest rate is low. But make sure to handle the payments monthly.
If you are still skeptical about purchasing a life insurance policy loan, consult a professional financial planner for better risk information.
How much can I borrow against my life insurance loan?
The first thing to make clear, you do not borrow from your life insurance. In fact, you take your life insurance policy (including cash value and death benefit) as collateral to the insurance companies. This means the element that decides your loan amount is the cash value.
Each insurance company has its regulations on the amount of loan. But the typical rate of money is considered from 85 to 90 percent of the whole cash value. The companies will keep a small portion to make sure the policy in force. One thing to remember, do not let the loan be close or equal to your policy’s cash value, or else you will have to face a considerable tax ahead.
How soon can you borrow against your whole life insurance?
The time when you can borrow against your life insurance is decided on your built-up cash value. Once your cash values are shaped, you can make a life insurance policy loan. Usually, the cash value takes time to build up, which can count for several years. The typical least duration is ten years. However, there are still additional programs for customers to accumulate cash value during their first few months. So, if you need the money right away, you can consider choosing these few types of policies (Be aware that borrowing so soon is sometimes not a good idea).
What happens if you do not pay back a life insurance loan?
If you do not pay all the loans before you pass away (including the principal and the interest), the remaining portions will be deducted from your death benefits. This also means your beneficiaries are cut off on some benefits. They will now have to pay off your leftover amount. There are no rules against no paying back life insurance policy loan, but it appears as a wise choice to timely do.
Can I use a life insurance policy loan to pay off another debt?
You can use a life insurance policy loan to pay off other significant debts, such as car, house, and financial company’s loans. And it is all thanks to those advantages of life insurance policy loans compared to traditional loans. It has low interest, no additional cost, and a flexible policy. With the traditional loans, customers need to pay off the monthly/ annual interest on time and pay the total amount. This case is, on the other hand, not for life insurance policy loans.