If you’re considering tapping into your life insurance for financial relief, it’s crucial to understand how borrowing from your policy works, its costs, and potential downsides. Here, we’ll explore what you need to know about life insurance loans to help you make an informed decision.
Can You Borrow from Your Life Insurance?
Yes, if you have a permanent life insurance policy with accumulated cash value, such as whole life, universal life, or variable life insurance, you can borrow against it. These policies build cash value over time from your paid premiums and the interest earned, which you can utilize through loans.
How Much Can You Borrow?
Typically, insurers allow you to borrow up to 90% of your policy’s cash value. For example, if your cash value is $10,000, you can borrow up to $9,000. The actual loan doesn’t come from your cash value directly but is provided by the insurance company using your cash value as collateral.
How to Borrow from Your Life Insurance Policy
Borrowing against your life insurance is straightforward:
Contact your insurance provider.
- Request a loan: there’s no need for credit checks or lengthy applications since your cash value serves as collateral.
- After approval: funds are usually disbursed within a few days either via direct deposit or a mailed check.
Terms of a Life Insurance Loan
Life insurance loans generally feature low interest rates (typically between 6-8% annually) and flexible repayment terms. You’re not required to make immediate repayments; however, interest accrues and is added to the loan balance. If the total loan amount exceeds the policy’s cash value, you’ll need to start making payments to avoid policy lapse.
Tax Implications
Life insurance loans are not taxable unless the policy lapses or is surrendered. In such cases, the outstanding loan balance and accrued interest may be considered taxable income.
Repaying a Life Insurance Loan
While repayment isn’t immediately mandatory, it’s wise to at least cover the accruing interest to prevent the loan from growing. You can make payments directly to your insurer as per your convenience.
Should You Borrow Against Your Life Insurance?
Here are the advantages and disadvantages to consider:
Pros:
- Quick access to funds.
- No credit checks.
- Flexible repayment terms.
- Non-taxable unless the policy lapses.
Cons:
- Reduces the death benefit.
- Risk of policy lapse if the loan plus interest exceeds the cash value.
- Potential tax consequences if the policy lapses.
Alternatives to Life Insurance Loans
If a life insurance loan doesn’t seem right for you, consider these alternatives:
- Life Settlement: You can sell your life insurance policy to a third party for a lump sum that is typically higher than the cash surrender value but less than the death benefit. This option is particularly viable for older adults or those with a high policy value.
- Policy Surrender: Surrendering your policy will terminate the coverage and provide you with the cash value, minus any surrender charges. This option is best if you no longer need the insurance protection and prefer to eliminate premium payments.
Deciding to Borrow
Deciding whether to borrow against your life insurance involves evaluating your financial needs, the health of your policy, and your future financial plans. Regularly requesting an inforce illustration can help you track your policy’s performance and ensure it aligns with your financial goals.
If you’re unsure about the best course of action, consulting with a financial advisor can provide clarity and help you explore all available options, including the potential for a life settlement. To explore this further or get a free policy valuation, contacting a reputable provider like Harbor Life Settlements can be a valuable step.
