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Can you borrow money from a life insurance policy?
Borrowing Money from a Life Insurance Policy
Though the primary focus of life insurance is to provide a benefit to the family of a lost loved one, some policies could add enhancements to a financial portfolio. If you are familiar with life insurance, you may know the term “cash value,” or the ability to borrow from a policy if you have paid a certain amount of premiums. This could be a temporary solution to financial emergencies, but it should require great consideration beforehand so you don’t put your investment at risk.
Can You Borrow Money From a Life Insurance Policy?
Not all life insurance policies build cash value, such as a term life policy. Term life insurance rates are typically less expensive than whole life and offer just the death benefit, not cash value. However, a whole life or universal life insurance policy may offer a cash value benefit, which may allow you to take out a policy loan.
What are the Advantages and Disadvantages of a Policy
Before you jump in and take a loan out against a policy, consider if taking funds from your life insurance policy makes sense for your situation. In addition to weighing the pros and cons below, speak with your insurance company about how taking out a loan will impact your policy.
- No lengthy application process like other loans
- If you have built up cash value, you can borrow without a credit check
- Policy reports do not show up on your credit report unlike other loans
- Policy loans typically have lower interest rates
- Repay the loan on a schedule you 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 Policy Loan Work?
When you borrow against your cash value from a life insurance policy, the insurance company uses the benefit as collateral. In other words, if you pay back the loan plus interest in full, your policy benefit will go back to the original amount you bought 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 Policy Loan?
You must build up the cash value before you can take out the money. Contact your life insurance representative and they will be able to tell you what your cash value is. You should also discuss how taking out the loan will impact your policy.
What Should I Consider When Taking Out a Policy Loan?
If you do not want to jeopardize 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 death 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.
Borrowing from a life insurance policy should be treated the same as taking out a loan from the bank – with due diligence. It is important to remember the primary reason for a life insurance policy is to take care of your beneficiaries should something happen to you. However, emergencies happen, so having cash value available could be a huge help in financial adversity. Before taking out a policy loan, you should gather your research and consider every angle.
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