How can I borrow money from my life insurance policy?


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While borrowing against your life insurance policy can be a quick and easy way to have cash on hand when you need it, there are a few things you should know before you borrow. Most importantly, you can only borrow against a permanent or whole life insurance policy.

Term life insurance, a cheaper and more suitable option for many people, has no cash value and expires at the end of the term, which is typically between one and 30 years. However, in some cases, term life insurance policies can be converted to a whole life insurance policy, which may make it eligible for a lifetime settlement payment.

Key points to remember

  • Borrowing against your life insurance policy can be a quick and easy way to have cash on hand when you need it.
  • You can only borrow against a permanent or whole life insurance policy.
  • Policy loans are borrowed against the death benefit and the insurance company uses the policy as collateral for the loan.
  • Life insurance companies add interest to the balance, which accumulates whether or not the loan is paid monthly.

Policies you can borrow

A whole life policy is a more expensive type of life insurance, but it does not have an expiration date. The term lasts for the life of the insured. Although the monthly premiums may be higher, the money put into the policy that is more than what is needed for the death benefit is invested by the life insurance company, creating cash value after a few years.

A whole life insurance policy has essentially two values: the face value or death benefit, and the cash value which acts as a savings account. Once the money invested increases the amount of the death benefit, the tax-free cash value can then be borrowed.It’s also important to understand that the policy loan is not taken out of your death benefit, but borrowed from it, and the insurance company uses your policy as collateral for the loan.

How a life insurance loan works

Unlike a bank loan or credit card, policy loans do not affect your credit and there is no approval process or credit check since you are basically borrowing from yourself. When you borrow against your policy, no explanation is required on how you plan to use the money, so it can be used for everything from bills to vacation expenses to a financial emergency.

The loan is also not recognized by the IRS as income, so it remains tax-exempt (provided it is not an amended endowment contract). However, a policy loan is always expected to be repaid with interest, although interest rates are generally much lower than on a bank loan or credit card, and there is no mandatory monthly payment.

Repay the loan

Even with low interest rates and a flexible repayment schedule, it is important that the loan is repaid in a timely manner. Unless paid out of pocket, interest is added to the balance and accrued whether or not the bill is paid monthly, putting your loan at risk of exceeding the cash value of the loan. policy and result in the forfeiture of your policy.

In the event of forfeiture of the policy, taxes must be paid on the cash surrender value.

Insurance companies generally offer many options to keep the loan up to date and avoid lapsing. If the loan is not repaid before the death of the insured, the loan amount plus interest due is subtracted from the amount beneficiaries are expected to receive as death benefit.

Advisor overview

Steve Kobrin, LUTCF
The cabinet of Steven H. Kobrin, LUTCF, Fair Lawn, NJ

You can borrow money from a life insurance company that has a cash account to use during the life of the insured. But here are three pitfalls to avoid:

  1. Do not reduce the death benefit: Withdrawing money from the life insurance policy while you are alive could reduce the survivor benefit.
  2. Do not modify the warranty: Permanent insurance guarantees are based on certain assumptions. The main one is that you will stick to your premium payments and accumulate money at a certain level. If you make a withdrawal, you may use up the amount needed to secure the collateral.
  3. Don’t pay more money: Some permanent policies will even provide the guarantee when you buy cash, but at a cost that might require you to pay more premium to cover the difference.

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