It’s easy to borrow against the cash value of a permanent life insurance policy. There are no loan requirements or qualifications (other than the cash value amount), and the funds can be used for any purpose and repaid whenever you choose. Plus, a life insurance policy loan has relatively low interest rates. lower it? If you don’t pay the interest on the loan, you could lose your policy (and its cash value) and end up with a big tax bill. Assuming you can keep up your payments, borrowing against your life insurance policy is an easy way to access cash.
can you borrow against your life insurance policy?
The cash value of a life insurance policy is equal to the amount of money you would receive if you dropped the policy. Every time you pay premiums for a cash value life insurance policy, like whole or universal life, part of the premium goes toward the cash value.
Cash value grows over time at an interest rate set by the terms of the policy. If you have a permanent life insurance policy that builds cash value, you can borrow money from the insurer using the cash value as collateral. however, this option is generally only available once the cash value of your life insurance policy has reached a specified size, which can take five to ten years of premium payments.
How much can you borrow from a life insurance policy?
The amount you can borrow from a life insurance policy varies by insurer, but the maximum policy loan amount is typically at least 90% of the cash value, with no minimum amount.
When you take out a policy loan, you’re not taking money out of the cash value in your account. Instead, you’re taking out a loan from the insurer and just using the cash value as collateral. this is a significant benefit, as the cash value remains within the life insurance policy and continues to accrue interest.
You are not required to repay the loan in a certain period, as is required in many other forms of loan. however, if you don’t pay the insurer the annual interest, which can be fixed or variable, the interest payment will be added to the value of your outstanding loan.
If your loan is spread over many years, it will be affected by compound interest. and if the total outstanding loan reaches the size of your policy’s cash value, the policy will lapse. If this happens, you will lose your coverage and face a high tax bill if the outstanding loan is greater than the amount you have paid in premiums.
There is a risk in borrowing nearly the full amount of the policy’s cash value, so if you take out a policy loan, always carefully monitor its size compared to its cash value. In addition, we recommend making interest payments whenever possible.
how do you get a life insurance policy loan?
The process of obtaining a life insurance loan is simple. you simply fill out a form from the insurer and often get the money deposited into your account within a few days. You may be required to confirm your identity, sign a confirmation document, or provide notarized confirmation before receiving your loan if:
pros and cons of taking out a life insurance loan
Loans secured by life insurance are an easy way to get money on short notice and with few restrictions. you must be very careful in managing the cash value of the account and paying interest as needed.
However, in addition to the risk of the policy lapsing, there are some downsides to borrowing against your whole or universal life insurance.
there are no requirements for a policy loan
Unlike other loans, you don’t need to qualify to get a loan against your life insurance policy. there is no credit check, so the loan does not appear on your credit report. and you do not have to provide proof of income. At most, you will only have to prove your identity and that you are requesting the loan.
See also: What to do with totaled car no insurance
Since there are no checks or scores, life insurance secured loans can be a great solution if you need money fast, like for an emergency medical expense. Alternatively, they can be used as a stopgap if you’re applying for a loan elsewhere, which takes a long time to get approved.
policy loans have low interest rates
Loans secured by life insurance generally have lower interest rates than you would get with a personal loan or credit card. While rates vary, they generally fall within the 6% to 8% range, again depending on who has your insurance and your policy. To illustrate, we collected loan interest rates for variable universal life insurance policies from three of the largest insurers:
Your cash value continues to earn interest throughout the loan. this can be at a fixed rate (such as 1.5%) or within a particular interest rate spread on the loan. For example, if your cash value was guaranteed to grow at a rate within 2% of your loan’s interest rate, which was 6%, it would be guaranteed to be at least 4%.
pay it anytime
When you borrow from your life insurance policy, you don’t have to repay the loan. Plus, you don’t have to pay annual interest, as long as the total outstanding loan (original loan plus accrued interest) doesn’t exceed the policy’s cash value. therefore, borrowing from your life insurance policy is a great alternative if you’re not sure how long you’ll need the loan.
Now, it’s generally in your best interest to pay off a policy loan as soon as possible. interest on the loan is compounded annually and the policy will lapse if the outstanding loan is too large. If this happens, you will have paid thousands of dollars in premiums with nothing to show for it (no coverage). Plus, you could also owe taxes if the outstanding loan is more than what you’ve paid in premiums.
Another reason to pay off the policy loan is that the full outstanding balance would be deducted from the death benefit your beneficiaries would receive when you die.